Svb, why did the Silicon Valley bank crash
Svb, the reference bank for Silicon Valley startups, takes a big risk: to cover a hole of 1.8 billion it was forced to sell shares, while its stock plummets. Will the crisis spread to the entire sector?
The US financial group SVB Financial Group – which owns Silicon Valley Bank, one of the largest commercial banks in the United States and the most important in the California technology district – is in trouble. Its shares plunged more than 60 percent on Thursday, with an $80 billion loss in value; meanwhile, the institution tries to convince customers that their money is safe. But many of America's top "venture capitalists," like PayPal cofounder Peter Thiel , are retiring.
A 1.8 BILLION HOLE
On Wednesday, the SVB launched a $1.75 billion equity sale to boost its balance sheet after the $1.8 billion hole caused by the sale (at a loss) of a $21 billion bond portfolio; a move made to offset the drop in deposits.
The portfolio, composed mainly of US government bonds, had an average yield of 1.79 per cent, much lower than the yield on ten-year Treasury assets (3.9 per cent).
THE IMPORTANCE OF SVB FOR THE SILICON VALLEY
SVB is a fundamental bank for startups in Silicon Valley, where it is based (more precisely in Santa Clara, in the center of the technology hub): it is in fact the reference creditor for almost half of US technology or healthcare companies backed by large lenders which went public in 2022, writes Reuters .
The agency explains that SVB's difficulties are also linked to the increase in funding costs decided by the Federal Reserve, the central bank of the United States, during the past year, and to high inflation.
THE INTERVENTION OF GENERAL ATLANTIC
Private equity firm General Atlantic said it would buy $500 million worth of shares in SVB.
SVB'S FUTURE PLANS
SVB said funds raised through the sale of the shares would be reinvested in short-term liabilities, and that it would double its term loan to $30 billion.
The bank also said it expected higher interest rates, and pressured public and private markets.
“When we see a return to balance between risk investing and burnt cash, we will be well positioned to accelerate growth and profitability,” said chairman and chief executive officer Greg Becker. SVB, he added, is "well capitalized."
THE IMPACT ON THE BANKING SECTOR
Even if not all analysts believe that SVB is experiencing a liquidity crisis – this is the case of those of Wedbush Securities for example -, there are fears that the group's difficulties will end up infecting the wider banking sector, starting with the Californian one.
Shares of First Republic, a San Francisco-based bank, lost more than 16.5 percent. But America's largest financial institutions were also hurt: Wells Fargo fell by 6 percent, JPMorgan by 5.4 percent, Bank of America by 6 percent and Citigroup by 4 percent.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/silicon-valley-bank-svb/ on Fri, 10 Mar 2023 14:38:52 +0000.