Trouble brewed on Thursday, March 9, when America’s most prominent startup financier, The Silicon Valley Bank, sank 60% almost overnight. Mint reports that this started soon after SVB Financial Group, the parent company, declared that it had liquidated $21 billion worth of securities from its holdings and was organizing a $2.25 billion share sale to raise money. Analysts believe large deposit withdrawals spurred the move at the bank due to a broader slowdown in the startup industry. SVB also anticipated a more drastic drop in net interest income.
As investors began to remove their savings from SVB, bank shares fell worldwide. The top American banks, including JP Morgan and Wells Fargo, felt the pressure, shedding more than $50 billion in market value.
The first crack in the ice
As per Wion, the bank had a significant increase in deposits in 2021, from $61.67 billion to about $189.20 billion. As its deposits increased, it needed to expand its loan book more quickly to produce the desired yield on the money it had deposited. To address this, the bank invested $80 billion in sizable mortgage-backed securities (MBS) for its hold-to-maturity (HTM) portfolio. With an average return of 1.56%, more than 95% of these MBS were for terms longer than ten years.
The value of SVB’s MBS, however, plummeted due to the Fed’s rate increase since consumers could now purchase “risk-free” bonds from the Fed for a 2.5x higher yield, which meant that as the Fed’s value increased, so the value of pre-existing bonds fell.
All of these accumulated to the shocking decline in stocks for SBV.
What accelerated the disaster?
SVB’s issues coincided with Silvergate Capital Corp.’s unexpected collapse, sending shockwaves across the banking industry and driving shares down. The yardstick of banking stocks, the KBW Bank Index, fell 7.7%, the highest in over three years. Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co. all fell at least 5%, as Asian bank shares followed the American banks’ lower.
What is the anticipated outcome?
According to the bank’s website, it does business with more than 50% of all US firms with venture capital funding and roughly 45% of US venture-backed tech and healthcare enterprises. Thus if the situation escalates to a degree where the bank can no longer operate, the Us economy can take a significant hit.
As investors in financial businesses constantly monitor other banks that the slump could potentially impact, startups withdrawing money are searching for alternative lenders where they can keep their capital. What will transpire when American markets reopen is still being determined. Bill Ackman, the CEO of Pershing Square Holdings Ltd., has advocated a bailout by the US government to salvage SVB.
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