Silicon Valley Bank’s shares have tanked, causing panic in the financial sector to spread from Wall Street to Europe and Asia. This comes after the lender announced it would sell shares at a loss in order to cover rapidly declining customer deposits.
Silicon Valley Bank (SVB) Financial Group, a bank which lends primarily to tech companies, told investors on Mar. 9 that it was forced to sell almost $2 billions in shares to raise additional capital to help offset bond sale losses.The news quickly triggered massive losses across the banking sector and raised concerns that the Federal Reserve’s interest-rate hikes were preventing banks from raising capital.
Before last year, when interest rates were near zero, large banks were buying up U.S. Treasurys and bonds, but the rise in the federal fund rate has since weakened their value, while banks sit on increasing losses.
Since banks tend to hold large portfolios of bonds, their decline is normally not a problem unless they are forced to sell them.
Bank Stock Values Plunge Across the Board
The news from the tech industry lender quickly caused a knock-on effect on Thursday, as banking stocks fell at their fastest pace since the first months of the pandemic, taking Wall Street’s major indexes down with them.SVB shares tumbled more than 60 percent and lost another 20 percent in after-hours trading, in the worst decline in the sector, after CEO Greg Becker admitted the bank could be dealing with problems for the foreseeable future.
Meanwhile, America’s four largest banks lost more than $50 billion in market value at the end of trading on Mar. 9.
Shares of JPMorgan Chase fell 5.4 percent, while Bank of America took a 6.2 percent hit, Wells Fargo was down 6.2 percent, and Citigroup tumbled 4.1 percent.
Bank stocks in Europe and Asia sold off sharply the following day, as news surrounding SVB Financial spread to markets across the world.
Silicon Valley Lender’s Bonds Lose Value to Rising Interest Rates
The interest-rate hikes over the past year have also caused value of its bonds to fall, particularly those that took many years to mature, forcing the bank to reinvest the proceeds from its sales into shorter-term assets.SVB has suffered significant losses on its portfolio, which was heavily invested in U.S. Treasurys and mortgage-backed securities, which have all taken a beating.
SVB additionally reported more than $90 billion in held-to-maturity securities.
Its recent losses have caused American startup firms, particularly venture-backed tech and life sciences companies, to feel the pinch, as the bank caters heavily to these new firms.
Higher interest rates, fears of a recession, and a tepid market for initial public offerings have made it harder for new startups to raise additional capital in the past year.
“The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered,” warned Pershing Square CEO Bill Ackman in a tweet.
“After what the Feds did to @jpmorgan after it bailed out Bear Stearns, I don’t see another bank stepping in to help @SVB_Financial,” he added.SVB Reassures Investors That Things Are Fine
The collapse of SVB’s stock value comes shortly after a key lender for the cryptocurrency industry, Silvergate Capital, announced liquidation plans on Mar. 8, following the implosion of FTX, which used the bank to transfer customer funds.However, the bank said in its letter to investors that it had minimal exposure to crypto, but analysts are still concerned that not all is well at SVB.
Becker reassured investors that their assets were safe and that the stock sale was only an attempt to increase financial flexibility, strength, and profitability at the bank, but the current market situation has caused pressure to its “balance of fund flows.”
The bank cited higher interest rates and “elevated cash burn from our clients” at a historically elevated level and less investments from venture capital, are the primary reasons for raising new capital.
Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”
He asked clients to “stay calm. That’s my ask. We’ve been there for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists.”
SVB’s mid-quarter update reported a low ratio of loans to deposits, at 43 percent, which leaves little protection in the wake of a share-price selloff over the coming days.
If startups panic and begin pulling funds from SVB due to concern about its financial health, this could exacerbate the mismatch in deposits and withdrawals, increasing pressure on the bank.
Still, one expert believes the problem goes deeper than just investors getting spooked by SVB and that it is more systemic.