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Bank stocks may need to drop at least 30% before its time to worry about the economy, says study

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U.S. bank shares, brutalized since the early March collapse of Silicon Valley Bank, may have further to drop before investors need to worry about economic growth, according to Oxford Economics.

A look at 150 years of past bank failures indicated that recent stress in bank stocks likely isn’t yet enough to signal fallout to the economy.

“Bank failures on their own often have a limited economic impact,” Jamie Thompson, head of macro strategies at Oxford Economics, wrote Thursday in a client note.

Furthermore, when bank shares dropped less than 30%, his team found the typical impact was about a 0.4% decline in the market value of goods and services produced (GDP), on average over the first five years.

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However, GDP fell about 3% over the same stretch when bank shares tumbled 30%-60% in past episodes of bank failures, and around 8% when they shed over 60%.

Read: First-quarter GDP climbs at lackluster 1.1% pace as U.S. businesses retrench

While overall U.S. bank stocks were off about 20% since early March (see chart), “the fall to date is only around a third of the typical declines in bank stocks seen in bank failure episodes during the global financial crisis,” according to Thompson’s metrics.

Bank stocks fell 30% during the Savings & Loan Crisis and about 60% in the wake of 2008.

Oxford Economics/Baron, Verner & Xiong (2020)/Haver Analytics/S&P Global

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As a gauge of bank shares declines, Oxford Economics tracked S&P Global’s bank equity real total return index. Regional bank stocks, however, have been hit particularly hard since the failures of Silicon Valley Bank, Signature Bank in March, and more recently with JPMorgan Chase & Co.’s

acquisition of failed First Republic Bank on Monday.

Shares of PacWest Bancorp

were down about 40% Thursday, according to FactSet, while those of Western Alliance Bancorp

were off roughly 3%. Since the start of the year, shares of the SPDR S&P Regional Banking ETF

were 38% lower, while the SPDR S&P Bank ETF

were down about 30% on the year.

With many regional banks facing pressure from lost deposits and underwater securities on their balance sheet, the White House on Thursday said it was monitoring short-selling activity on bank shares.

Major U.S. stocks indexes were lower Thursday, with the Dow Jones Industrial Average

off 1% and the S&P 500 index

0.7% lower, a day after the Federal Reserve fired off another rate hike of 25 basis points, bringing its policy range to 5%-5.25%, its highest since 2007.

See: ‘Taking out the hike that just happened’: Traders ignore Powell and begin pricing in a Fed rate cut as soon as June

Also check out: ‘Generous but expensive’: The costs of helping banks alleviate deposit stress don’t come cheap

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