Those who wanted to profit from the drastic interest rate hikes to curb inflation on the stock market have recently liked to bet on financial stocks. But now the tide has turned significantly: The crisis surrounding the Californian start-up financier Silicon Valley Bank shows that rising interest rates can also burden banks. On the one hand, these bring higher interest income and boost profits. However, this calculation was thwarted by the fact that rising interest rates on the money market are causing many savers to look for better offers elsewhere.

In order to make up for the gaps from the outflow of funds, many banks are forced to sell bond holdings whose value has dwindled with the rise in interest rates. The result is losses, and fears of increasing selling pressure in the bond market. On Wall Street, bank stocks suffered their heaviest losses since June 2020 on Thursday. Silicon Valley Bank's shares fell 60 percent as the institution, based in Menlo Park, California, needs a billion-dollar capital increase to cushion losses. However, there was also a significant decline in the broad sector, with smaller players as well as industry giants such as JPMorgan Chase. whose shares closed down 5.4 percent.

Is this an isolated case?

In Frankfurt, Deutsche Bank AG shares fell 7 percent on Friday, Commerzbank fell 4 percent in Xetra trading and Credit Suisse shares in Zurich fell 4.6 percent. Bank bonds were also under pressure. The price losses caused the risk premiums to rise. "Today's news highlights a risk that most investors didn't seem to have on their radar," said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. "This may be an isolated case. But the concern is that other banks could now report similar problems."

Hedge fund manager Bill Ackham called for government aid for Silicon Valley Bank. The US government should consider a "highly dilutive" bailout if no solution can be found in the capital market, suggested the founder of activist hedge fund Pershing Square. The importance of the bank lies in the fact that many young companies financed by venture capitalists use it as lenders and hold their working capital there. A failure of the bank could damage a long-term stimulus for the economy, Ackman explained in a series of tweets.

"US banking system as a whole solid"

On the other hand, Mohamed El-Erian, the former head of the Allianz fund division Pimco, is trying to calm down. U.S. banks would get the risk of contagion and systemic stress from the turmoil surrounding Silicon Valley Bank under control, he said on Friday. "Through careful balance sheet management and the avoidance of further monetary policy mistakes, the risk of contagion and systemic threat can be easily managed," El-Erian wrote on Twitter. "The U.S. banking system as a whole is sound, which doesn't mean every bank is."

Just last week, U.S. bank stocks were up year-on-year, with news circulating that corporate deposits fell in 2022 for the first time since 1948. Sudden sell-offs are considered particularly worrying on the stock market at banks. Due to their role as investors, they are often assumed to provide signals for the wider market. This week's drama is likely to be grist to the mill of those who warn of a recession.

"I don't think that's an early warning sign, but I feel like the market sees it that way," said Art Hogan, chief market strategist at B. Riley Wealth. Until now, analysts had expected higher interest income. That confidence is now being tested, according to Michael O'Rourke, chief market strategist at JonesTrading. So far, "the reality has been consistently ignored that the higher interest rate environment will bring headwinds to companies in the future," he said. "In my view, this underlines that rising interest rates do play a role after all."