On Friday, Silicon Valley Bank, the tech bank caused tremors in the banking sector with shares in leading lenders around the world plunging, after it dumped assets to raise cash to cover withdrawals.
Silicon Valley Bank (SVB) caters to the tech industry and the venture capital funds which invest in startups. SVB is present in the United States, Europe, Asia, and Israel, the bank provides a range of financial services to startups, from simple bank accounts to advisory services on how to attract assets, as well as personal banking and funds management.
SVB boasts on its website that about half of all US venture capital-backed tech and life sciences firms are its clients, including Pinterest and Shopify.
On Wednesday, SVB Financial Group announced that it would try to raise $2.5 billion in new funds through a share offering, after having sold off $21 billion in securities at a loss of $1.8 billion. The bank was trying to raise funds to encounter a wave of withdrawals by clients.
According to Bloomberg, investment funds were recommending their clients withdraw their funds from SVB, worsening the crisis for the bank.
On Thursday, Greg Becker, SVB’s chief executive aimed to comfort clients about the bank’s financial health, reported by The Wall Street Journal citing people familiar with the matter. The newspaper said Becker suggested they were against withdrawing their deposits from the bank and to not extend fear or panic about its situation. While Trading in the bank’s shares was discontinued on Friday after having fallen 60 percent on Thursday.
SVB’s stress on the tech industry made it vulnerable to the deteriorating situations for the sector: the sharp growth in interest rates and a decline in risk desire among investors plus ongoing supply chain crises. After more than a decade of relentless development, the stock market capitalization of tech companies dropped last year and they announced tens of thousands of releases.
While higher interest rates are normally good for banks as they can gain more from lending, a lot relies on the rate they have to spend to earn funds. Short-term interest rates are nowadays higher than long-term interest rates in the United States, shrinking more vulnerable banks and complicating investments.
SVB offers that bank handles, the self-fulfilling terror by depositors to remove their cash on the suspicion that a bank will tumble, which remains very much a hazard in today’s world despite bank regulation.
The question now is which other banks could be under pressure because of the squeeze on interest rates.
The banking risk remains limited to very small banks and a limited number of 10 or so US regional banks.”
Christian Parisot-Analysis said in a note for the brokerage Aurel BGC.
But top hedge fund manager Bill Ackman compared the bank’s situation to the difficulty of Bear Stearns, the first domino to drop in the global financial crisis 15 years ago.
“That is why government intervention should be considered.”
Bill Ackman tweeted.
