How Silicon Valley Bank Collapsed

Silicon Valley Bank, a leading lender for the tech and venture capital sectors and America’s 16th largest bank by balance sheet size, seized by federal regulators on Friday in the biggest institutional failure since the 2008 financial crisis. Investors are still scratching their heads about what happened to the bank, as the entire collapse happened overnight. As of Thursday morning, the bank had a market cap of more than $15 billion and as of Friday, $209 billion in assets and $175 billion in deposits made it the second largest bank failure in US history, according to the FDIC.

The collapse flashed widespread panic in the tech investor and startup world, many of the depositors based in silicon valley are still trying to understand their exposure and how they can get their money back. Unfortunately, at the center of all this is the same dynamic that caused the institutional failure of traditional banks in 2008 and among many cryptocurrency exchanges during last year’s “crypto winter”: a bank run. As concerns about the lender’s solvency rose earlier this week, a wave of attempted withdrawals turned into a tsunami, sending the bank’s value spiraling out of control.

The roller coaster started on Wednesday, when successive announcements through SVB rattled investors. The bank suddenly disclosed that it had sold $21 billion in investments, resulting in an after-tax loss of $1.8 billion for the quarter, and that it was conducting a stock sale worth $2.25 billion in an attempt to raise in its finances. on a letter to stakeholders by CEO Greg Becker, the bank also revealed that it is borrowing $15 billion more than originally planned.

In the letter, SVB discussed rising interest rates, increasing opportunities for technology companies to burn cash, and other market pressures amid a negative economic environment. The Fed has raised interest rates eight times in the past year, with more hikes on the horizon, and the tightening campaign has bonds are devalued which is usually invested by the bank to make the strategy of lending to most Silicon Valley-based startups possible. But the end of the Fed’s “easy money” era has been bad for tech startups and for the bonds held by this particular startup-focused bank. The center suddenly did not hold.

Becker’s letter said the borrowing rounds would help offset losses from its bond sales, and insisted the bank remains solvent, saying it is “well capitalized, with high quality, liquid balance sheet and peer-leading capital ratios.”

Investors aren’t buying it.

Shortly after the disclosure of SVB, clients and investors began to pull their deposits and assets from the bank as fast as they could, with a corresponding effect on its stock price: It fell to 60 % on trading on Thursday, then another 20% on trading after the market. , leading to a wipeout at the opening of markets on Friday. The tech sector has been unusually nervous for months, as a negative market environment has hit tech companies the hardest, leading to large stock devaluation and extensive cost-cutting measures. Many investors are also on the sidelines after a Californian bank, the popular lender to crypto startups, Silvergate, crushed on Wednesday, the latest of many failures in the crypto industry last year.

Becker tried to stem the tide on Thursday during a call where he reportedly urged investors to “remain calm and support us as we support you in this challenging time,” while continuing to insist that the bank is solvent.

But the damage was done. NEwS of the seen troubles in the bank already spread like wildfire on social media, heightens fear and worsens sales. Bigger names were involved in the wear on Thursday, advising companies to reduce their exposure to SVB as much as they can. Founders Fund, the VC fund started by PayPal Co-founder Peter Thiel, advised portfolio companies to remove their cash and assets from the bank, citing concerns about financial stability, Bloomberg reported Thursday night.

Investors are still confident that SVB will survive because of its importance to the industry and the technology economy as a whole. “SVB is not going down,” a VC investor said SPOKE luck Thursday, referring to the 2008 belief that some banks were too entrenched to fail: “It can’t be — it’s like, too big to fail.” Even financial advisors recently considered SVB a good investment, including CNBCof Jim Cramer who last month put the bank’s parent company as one of his top 10 stocks to buy of the S&P 500.

But by late Thursday, almost no one was pretending SVB was solvent. Billionaire hedge fund investor Bill Ackman wrote Thursday night that the government should consider ENTER for SVB to bail. By Friday morning, SVB’s parent company was reported to be looking for a bank fire sale after failing to find any last-minute capital to support it, as the first report of CNBC. But withdrawals and sales continue to a blistering paceand with no interested buyers comethe bank and its assets were eventually seized by the FDIC.

There are very few certainties as to what comes next. The FDIC said Friday that SVB deposits lower than the regulatory body’s $250,000 insurable limit would be available for withdrawal on Monday. Clients with deposits higher than the insurable limit should wait and see what the bank’s assets are eventually sold, to know how much they will get. The FDIC has issued certificates which will allow clients to be the first to get any payment, although it is not clear when it will happen and how much funds will be available.

The search for a buyer, and the goal is to make an agreement for all the assets of the bank or only some of them on Monday, Bloomberg reported after a seizure. JPMorgan analysts said on Friday that SVB remains “world class” firm and that its current share price is a “very attractive valuation.”

An immediate concern is whether the collapse of SVB will have an impact on other banks. Many US banks, especially smaller ones, are facing the same issues as SVB as interest rates continue to rise, and while no other banks have raised concerns about their solvency, the some small and regional including First Republic and PacWest The Bancorp saw their stock slide significantly in the past 24 hours while the SVB debacle has prompted the sale of other banks since Thursday.

luckThe CFO Daily newsletter is must-read analysis that every finance professional needs to keep up with. Sign up now.





Source link

Leave a Reply

Your email address will not be published. Required fields are marked *