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Silicon Valley Bank (SVB), one of the largest lenders in the United States, has unleashed a wave of panic in the country and sent bank stocks down across the world.
The development comes as SVB announced a stock sale to shore up its finances, but the plan did not go down well on Wall Street as investors went on a selling spree, triggering a crash in its shares.
Asks customers to “stay calm”
The difficulties encountered by SVB are linked to the sharp rises in Fed rates since March 2022. As a result, the value of Treasury bills held by the bank is falling, as operators buy more profitable securities, while getting rid of those that don't pay much anymore.
At the same time, many start-ups, which struggle to raise capital in times of high money, are reduced to burning the cash they hold in the bank and asking for their money, all at the same time. Silicon Valley Bank, for fear of a liquidity crisis, therefore abruptly sold its portfolio of Treasury bonds with a loss of 8.5% (1.8 billion dollars out of 21 billion).
Result: the bank does not seem very far from a bank run, a panic during which customers, fearing that it will become insolvent, begin to withdraw their deposits as quickly as possible.
Well-known investors such as Peter Thiel, co-founder of Paypal and reference in venture capital, have also advised SVB's client companies to withdraw their money. The bank's chief executive, Greg Becker, asked his customers to "stay calm".
When and how did the crisis begin?
The crisis for Silicon Valley Bank (SVB) began with a sharp drop in its stock and bond prices in 2021. The bank had experienced a significant increase in deposits but was unable to generate the yield it wanted due to a lack of loan growth.
To address this, SVB purchased an $80 billion mortgage-backed security for its hold-to-maturity portfolio, with over 95% of the securities for over 10 years and an average yield of 1.56%.
However, the value of the MBS decreased as the Federal Reserve (Fed) raised interest rates, making "risk-free" bonds from the Fed more attractive to customers with a yield 2.5 times higher.
As a result, the value of existing bonds fell with the rising value of the Fed. This led to a sharp decline in SVB's stock price and bond yields, which raised concerns about the bank's financial health.
What should you do?
If you have less than $250,000 deposited in the bank, the FDIC will cover you in the event of bank insolvency.
Low deposit rates offered by banks have pushed some customers, including the author of this article, to withdraw their money and invest it elsewhere.
In particular, a money market fund was yielding 4.2% and a savings account at Bank of America was yielding 0.3%, compared to Bank of America's average deposit rate of 0.96% and SVB's rate of 2.33%.
While SVB's higher deposit rate may suggest that the bank is more concerned about losing deposits than the industry as a whole, it is important to consider the potential opportunities lost by not exploring alternative investment options.
Analysts remain hopeful that SVB's issues will not have a widespread impact on the banking industry.
For Mike Mayo, a specialist in the banking sector at Wells Fargo, the problem of SVB is linked to "the lack of diversification of funding" with most deposits coming from venture capital. Its situation "does not reflect that of the rest of the sector", he believes. But it "affects the mindset" of investors.
Silicon Valley Bank
"Silicon Valley Bank" is a financial institution that primarily serves the technology and innovation sector. It was founded in 1983 and is headquartered in Santa Clara, California, USA.
The bank provides various financial services, including loans, lines of credit, and deposit accounts, to technology companies, venture capitalists, and private equity firms.
In addition, the bank offers strategic advice and connections to its clients to help them grow their businesses.
"Silicon Valley Bank" has expanded globally and now operates in several countries, including the United Kingdom, China, and Israel.
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