Thursday turned out to be bad for the banking industry as the benchmark KBW Bank Index went down by 8.1 per cent in one the biggest one-day decline since June 2020. SVB Financial Group, the parent of Silicon Valley Bank was the worst hit with a loss of close to 60 per cent. This came after the bank on Wednesday launched a $1.75 billion share sale to navigate declining deposits from startups struggling for funds amid increasing spending.
What's happening at SVB?
The Santa Clara-based SVB's ordeal began when it started downsizing its securities by selling $21 billion of securities from its portfolio. The company additionally announced that it will be holding a $2.25 billion share sale to shore up finances. This decision came after the increase in deposit outflows at the bank because of a broader downturn in the start up industry. The company is also forecasting a sharper decline in net interest income.
As per reports by Bloomberg, SVB CEO, Greg Becker in a letter to the shareholder on Wednesday said, "We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses."
This sell off by the company spooked a number of prominent venture capitalists like Peter Thiel's Founders Fund, Union Square Ventures and Coatue Management, who according to a media report are limiting exposure and withdrawing the cash from the bank. While some venture capital firms are standing in support of SVB there are a few who have asked portfolio companies to shift some of their cash away from the bank.
The bank which is less than a tenth the size of JPMorgan is not big enough to spark a national crisis, but as the bank mainly finances technology-related startups the issue began with the increasing withdrawal of startups. This pullout by startups is due to decreasing fund investors because of the increasing Federal Reserve's interest-rate. In addition to this there is also an increasing fear of recession.
How does this affect SVB?
The sell off directly impacted the shares with the stocks falling by 60 per cent on Thursday, even the bonds saw a decline. This drop in shares resulted in a loss of close to $80 billion in value. This is the worst drop in close to 35 years. This also set the bank in a frenzy and the Chief Executive Officer, Greg Becker in a conference call asked the bank clients to remain calm.
Why did the issue escalate?
The problem coincided with the abrupt shutdown of Silvergate Capital Corp and both these incidents together sent out shock waves through the banking industry pulling it down by 8 per cent. Major banks in the US including Wells Fargo and Co., JPMorgan Chase and Co. and America Corp. went down by at least 5 per cent. It also impacted the broader markets with the banking sectors moving at the lower end.
What to expect?
Startups withdrawing funds is a problem that can affect other banks as well. Investors will therefore keep a close watch on other banks as well in case they are also affected by this problem. There are expectations that the government will bailout the bank, but whether a bailout is required or not is yet to be seen.
For the bank the worst-case scenario will be to sell the bank to a rival or make cut downs but with SVB's stock sale this situation may not occur.
