Silicon Valley Bank triggered a panic in the banking sector on Friday, with shares in leading lenders around the world plunging, after it dumped assets to raise cash to cover withdrawals.
What is SVB?
Silicon Valley Bank (SVB) is based in Santa Clara, California and caters to the tech industry and the venture capital funds which invest in startups.
Present in the United States, Europe, Asia and Israel, the bank offers a range of financial services to startups, from simple bank accounts to advisory services on how to attract investments, as well as private banking and wealth management.
Problems at SVB
The parent company of the commercial bank, SVB Financial Group, announced Wednesday that it would try to raise $2.5 billion in fresh funds through a share offering, after having sold off $21 billion (~R385 billion) in securities at a loss of $1.8 billion (~R33 billion).
The bank was trying to raise funds to confront a surge in withdrawals by clients.
According to sources to Bloomberg, investment funds were advising their clients to withdraw their funds from SVB, worsening the situation for the bank.
SVB chief executive Greg Becker sought to reassure customers about the bank’s financial health on Thursday, The Wall Street Journal reported, citing people familiar with the matter.
The newspaper said Becker urged them against pulling their deposits from the bank and to not spread fear or panic about its situation.
Trading in the bank’s shares were suspended on Friday after having fallen 60% on Thursday.
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Why the problems?
SVB’s focus on the tech industry made it vulnerable to the deteriorating conditions for the sector: the sharp increase in interest rates and a weakening risk appetite among investors plus continued supply chain problems.
After more than a decade of relentless growth, the stock market capitalization of tech companies tumbled last year and they announced tens of thousands of layoffs.
Banks have also been impacted by the increase in interest rates.
While higher interest rates are generally good for banks as they can earn more from lending, a lot depends on the rate they have to pay to acquire funds.
Short-term interest rates are currently higher than long-term interest rates in the United States, squeezing weaker banks and complicating investments.
What bank next?
The misfortune of one bank can affect the confidence of investors in the entire sector across the globe.
The interdependence of banks was driven home by the 2008 collapse of Lehman Brothers, which is widely considered the trigger for the global financial crisis.
SVB shows that bank runs, the self-fulfilling panic by depositors to withdraw their cash in the fear that a bank will collapse, remain very much a threat in today’s world despite bank regulation.
For analyst Christian Parisot, “the question now is which other banks could be under pressure” because of the squeeze on interest rates, he said in a note for the brokerage Aurel BGC.
He added that “the banking risk remains limited to very small banks and a limited number” of 10 or so US regional banks.
But top hedge fund manager Bill Ackman compared the bank’s troubles to the plight of Bear Stearns, the first domino to fall in the global financial crisis 15 years ago.
“That is why government intervention should be considered,” he tweeted.