First Republic leads regional bank rout as Silicon Valley Bank failure raises fears about bond losses

Regional and mid-sized bank stocks fell sharply on Friday as SVB Financial failed to find a buyer amid a rapid outflow of cash from clients and was shut down by regulators.

Shares of First Republic fell 20%, while PacWest Bancorp fell more than 23%. Signature Bank, which has heavy exposure to the crypto industry, fell nearly 13%.

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The declines on Friday were building on large sell-off from Thursday. The S&P Regional Bank ETF is down about 15% for the week, which would be its worst week since March 2020.

SVB came under pressure after announcing on Wednesday that it had lost $1.8 billion on an asset sale and was looking to raise more capital. CNBC's David Faber reported on Friday that the fundraising effort had failed and that SVB was exploring a potential sale. But Faber also reported that the sale process was becoming difficult because of the rapid outflow of deposits from the bank.

At midday Friday, regulators said they were shutting down the bank and the FDIC would take over insured deposits. Regional bank shares had recovered some of their morning losses, but news of SVB's failure sent them tumbling again.

While SVB's situation is somewhat unique because of its funding base focused on tech start-ups, other banks with large bond portfolios could face similar issues if they were forced to sell those bonds before maturity in order to raise funds. Treasuries have fallen in value the last 12 months as the Federal Reserve hiked rates eight times.

Those bond sales could incur losses like what has occurred with Silicon Valley Bank.

Still, Wall Street analysts believe that the issues at SVB are unlikely to spread to the broader banking sector. Shares of large banks like JPMorgan Chase and Citigroup saw smaller declines on Friday.

What's more, most of the assets involved are Treasuries, which are not at risk of default and will keep their value at maturity. The financial crisis of 2008-2009 involved mortgage-backed securities that collapsed in values from housing loan defaults.