Silicon Valley Bank Collapse Sparks Panic in Financial Markets
Silicon Valley Bank (SVB) suddenly collapsed this week after the bank announced it had incurred a $1.8 billion loss due to a $21 billion fire sale of its bond portfolio. The bank's share price plummeted over 60% to $106.04 on Thursday, triggering a bank run and forcing the Federal Deposit Insurance Corporation (FDIC) to step in and seize the bank's assets.
This is the biggest banking failure since Washington Mutual during the height of the 2008 global financial crisis. The selloff has sent shockwaves through the tech industry as venture capitalists (VCs) and tech executives scramble to assess the potential repercussions and figure out ways to access funds from their investors and customers.
Timeline of Silicon Valley Bank's collapse began in November when Martin Gruenberg, the acting chairman of the FDIC, flagged mounting unrealized losses in bank securities portfolios as an “overhang” that could soon become “problematic”. Gruenberg noted that these unrealized losses weaken a bank’s ability to meet unexpected liquidity needs.
The situation at Silicon Valley Bank was compounded when tech companies, facing leaner times, pulled out their money. SVB attempted to raise cash by selling bonds, crystallizing $1.8 billion in unrealized losses on its balance sheet. The bank then announced plans to raise $2.25 billion in fresh equity, mainly through a dilutive share offering.
Billionaire hedge fund manager Bill Ackman compared SVB’s situation to Bear Stearns, the first bank to collapse at the start of the 2007-2008 global financial crisis, and called on the government for a “highly dilutive” bailout if the private sector doesn't step up. Secretary of the Treasury Janet Yellen has acknowledged the developments and is monitoring the situation carefully.
Other companies such as JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Charles Schwab (SCHW) have also been hit hard by the news. The 10-year Treasury yield tumbled 10 basis points to 3.82% and the 2-year yield slumped 11 basis points to 4.79%.
This collapse of SVB could have a domino effect on the rest of the banking sector.
0. “Are Failing Banks About to Destroy the Economy?” VICE, 10 Mar. 2023, https://www.vice.com/en/article/v7b4jx/silvergate-svb-failing-banks-economy
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6. “Dow Jones Futures Fall With Jobs Report Due After S&P 500 Sell-Off; SVB Financial Still Crashing | Investor's Business …” Investor's Business Daily, 10 Mar. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-sp-500-breaks-support-as-svb-financial-slams-bank-stocks-jobs-report-due/
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