The problems of this small tech bank shocked the entire banking world

At first glance, it appears to be a small bank with a specific niche as a target group: the Silicon Valley Bank (SVB) from San Francisco. But on Thursday and Friday, a press release from SVB caused a global sell-off of bank shares. The four largest American banks lost 52 billion dollars in market capitalization (50 billion euros) on Thursday. In Europe, the general banking stock market index plunged more than 4 percent on Friday. The news finally followed on Friday afternoon that the regulators had intervened at SVB. Why are investors in financial stocks reacting to the news of this ‘niche bank’? Three questions.

1 What is SVB for a bank?

Founded in 1983, Silicon Valley Bank calls itself the “financial partner of the innovation economy”. Clients are venture investors in the tech sector and their investments: the start-ups. The idea is that by becoming the house banker of start-up companies early on, money could eventually be made if some of these companies manage to get big and go public or otherwise need financial services.

SVB may be a small bank if you compare it with general banks – the bank is the fifteenth largest bank in the United States – but in the tech financing niche, the bank is a major player. In the American tech sector, almost three out of ten financings run through SVB. The SVB is also the “backbone for start-ups” for many Dutch parties active in Silicon Valley, says Oliver Binkhorst of the Dutch start-up network DutchTechSF. Many of them keep their balances with the bank.

For many Dutch parties active in Silicon Valley, the SVB is the “backbone for start-ups”

SVB has been very successful with this in recent years. It piggybacked on the rise of the tech sector, where investment money sloshed against the plinths thanks to the low interest rates. Where in 2008 the bank still had $ 10 billion in assets on its balance sheet, $ 212 billion in assets was reported last year. In 2022, the bank made $1.51 billion in profit. On the stock market, the company was worth more than $ 700 per share at its peak in November 2021. At the beginning of last month, a share of SVB was still over $ 315.

2 What is the bad news from SVB?

Silicon Valley Bank announced on Thursday that it would have to issue additional shares for an amount of $ 2.25 billion. Reason: the bank needs liquid assets to be able to pay out the many customers who want to access their reserves. Those customers want access to their deposits with the bank, because the tech sector is currently making large losses and investors have become hesitant.

In the same press release, SVB reported that another attempt to release cash led to major losses. The sale of $21 billion in assets that can be sold in times of stress like this resulted in a loss of $1.8 billion. This mainly concerned US government bonds that were once purchased at a low interest rate and that have fallen sharply in value due to the sharp rise in market interest rates in recent months.

SVB’s announcement caused a chain reaction of new negative news. The bank received a lower rating from credit rating agency Moody’s. This lower valuation means that collecting money becomes more expensive for the bank. What also absolutely did not cooperate was the call of one of the most famous venture investors in the world, Peter Thiel. His investment fund, Founders Fund, called on all companies it advises to also withdraw their money from Silicon Valley Bank because of concerns about the bank’s financial stability.

Attempts by the bank to appease investors proved fruitless. During Wall Street’s opening hours on Thursday, SVB’s share price already fell by 60 percent to $ 106. In aftermarket trading and before the opening of the new trading day on Friday, the share fell further to just under $ 36. The stock market watchdog eventually halted trading pending news from the company.

And that came. In the end, it was already the end of practice for SVB in a few hours. The low share price made it even more difficult for the bank to attract new money. As a result, the share issue failed, and discussions with other financiers also failed. Just before 18.00 Dutch time regulator FDIC took over power at the bankin order to safeguard customers’ funds.

3 Why does this affect the global financial sector?

The shock was good after the news from SVB. The four largest US banks – JPMorgan, Citigroup, Wells Fargo and Bank of America – saw $ 52.4 billion in market capitalization evaporate on Thursday. In Europe, the atmosphere was equally bad. A stock market index of European banks, the Stoxx, lost around 4 percent. In the Netherlands, the share of ING had collapsed by about 5 percent at the time of closing, while ABN Amro had lost just under 3 percent.

The question is why. Investors in SVB may see a canary in the coal mine. Don’t the same problems play out at other banks, investors wonder? The question is whether that fear is justified. Experts have against the Financial Times said that SVB had invested money very one-sidedly in low-yielding long-term investments, such as US government bonds. As a result, the bank has become very sensitive to interest rates. Because that interest rate has risen very fast in the past year, those investments (with low interest rates) have become considerably less valuable.

Most banks have a more balanced distribution of where they put their capital. This makes them less sensitive to the effect of higher interest rates. In fact, in recent months, banks generally did very well on the stock market, because of the higher interest rates. This ensures that banks have seen their interest margin, their main source of income, rise again to healthy levels.

Read also: How long will the big banks keep the wind at their backs?

What can be a justified concern is that customers will request their money from their bank, just like from SVB, now that the economy is deteriorating. That could affect banks’ incomes and balance sheets. In order to attract savings again, banks will probably raise their interest rates on savings, which could cause the interest margin to fall again. And in order to have sufficient liquid assets, banks must also start monetizing assets – which can lead to losses.

Perhaps the most important risk of the fall of SVB is the loss of confidence. As a commentator of the Financial Times wrote: especially in the banking sector, that trust can take on a life of its own. If enough people believe that SVB is a canary, the bank will automatically grow yellow wings and a beak. Investors and savers will then withdraw their money from banks, after which they could still run into problems despite solid fundamentals.

The German Commerzbank has already taken an unusual step, according to the Reuters news agency, by actively responding to the fears in the market. According to Commerzbank, there is no threat to the bank and there is no ‘corresponding risk’ with SVB. The question is whether all market nerves are really calmed by these kinds of messages.

Addition (March 10, 2023): this message was updated around 6 p.m. with the news that the board of SVB has been taken over by the regulator.

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