Silicon Valley Bank (SVB) a key lender to technology start-ups, also known as a financial pillar of the innovation economy in America, has landed in liquidity crisis that has sent shock waves through the start-up ecosystem. SVB financial group bonds plunged alongside its shares after the bank announced a $2.25 billion share sale to help shore up its finances.
The shares in the banks have fallen around the world, as investors moved to withdraw their deposits from SVB, the largest US banks including JP Morgan and Wells Fargo felt the heat, with losing more than $50 billion in market value.
What is Silicon Valley Bank?
Silicon Valley Bank is one of the largest banks in United States and it is a commercial bank. It is a subsidiary of SVB Financial Group and is considered biggest bank in Silicon Valley.
As per the report by Fortune.com, the bank has a relationship with more than 50% of all venture-backed companies in the US. Venture or private equity funds marked up approximately 56% of the bank’s global banking portfolio in 2022.
What has happened?
The Santa Clara, California-based SVB Financial Group announced that they had sold $21 billion of securities from its portfolio at a $1.8 billion loss. The Group was holding a $2.25 billion share sale to shore up finances, which included US Treasuries and mortgage-backed securities. As per the analysts the move was prompted by high deposit outflows at the bank due to a broader downturn in start-up industry, leading to sharper decline in its net interest income. The rise of Fed rates also led to a chain reaction to downgrading the value of SVB, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.
Impact on share price
Yesterday, SVB Financial Group shares tumbled the most in more than 20 years after the group took steps to bolster its financial position that includes a stock offering. BBC reported that, SVB announced that they had sold $21 billion of their Available for Sale (AFS) securities at a $1.8 billion loss, and were raising another $2.25 billion in equity and debt. It surprised the investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio.
BBC added that the shares of SVB saw their biggest one-day drop on record as they plunged by more than 60% and lost another 20% in after-hours trade.
What has the bank said?
Silicon Valley Bank's Chief Executive Officer Greg Becker said in a letter to shareholders Wednesday, "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." As per the reports, the bank said that client cash burn remains 2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment.
What happens next?
As per BBC, prominent venture capitalists have advised portfolio businesses to withdraw their money from SFB even as the bank urged calm response.
Founders Fund, a high-profile VC firm, asked its portfolio companies to move their money, Bloomberg News reported.
India’s top banker Uday Kotak tweeted, saying, “Overnight developments in US banking: markets, analysts, investors underestimate the importance of financial stability for the balance sheet of a bank. When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere”.
Hannah Chelkowski, founder of Blank Ventures, a fund that invests in financial technology, told the BBC the situation was ‘wild’. "It's crazy how it's just unravelled like this... The interesting thing is that it's the most start-up friendly bank and supported start-ups so much through Covid. Now VCs are telling their portfolio companies to pull their funds," she said.