US regional bank stocks fall after Yellen says more bank mergers necessary

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Yellen also reaffirmed the strength and soundness of the country’s banking system at the meeting with bank CEOs on Thursday in the aftermath of the collapse of Silicon Valley Bank, Signature Bank (OTC:SBNY), and First Republic Bank (OTC:FRCB).

The KBW Regional Banking Index fell 3%, with shares of PacWest Bancorp and Western Alliance (NYSE:WAL) among the biggest losers as they shed 4% each. Comerica (NYSE:CMA) Inc was down 3%, Zions Bancorp. fell nearly 5%, and Valley National Bancorp (NASDAQ:VLY) dropped 5.2%.

The regional bank crisis has been partly blamed by some on aggressive interest rates by the U.S. Federal Reserve, which forced some lenders to seek new capital to make up for a fall in the value of assets linked to interest rates.

Fed Chairman Jerome Powell said on Friday the after-effect of recent banking sector troubles is expected to take some pressure off the U.S. central bank’s interest rake hiking cycle.

Tighter credit conditions meant that “our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” Powell told a central bank conference in Washington.

But Tom Plumb, portfolio manager at Plumb Balanced Fund, said he doesn’t expect the Fed to start lowering interest rates anytime soon as the U.S. economy is still showing signs of strength and inflation is not abating as quickly as expected.

“People thought that inflation was going to come down faster and that the pressure on these regional banks and those failures were leading to this narrative that the Fed was going to lower interest rates by the end of this year. I don’t think that’s the case,” Plumb said.

An agreement on raising the U.S. debt ceiling is still possible if both Republicans and Democrats negotiate in good faith and recognize they won’t get everything they want, a White House official said on Friday shortly after an impasse in talks was reported.

The debt ceiling dispute has weighed on market sentiment, including for regional bank stocks.

“Unfortunately, the way our government works they are going to take you to the brink and they’re going to cause a significant last wave of panic. And then they will come up with some type of resolution,” Plumb added.