Financial markets rally after Silicon Valley Bank’s ‘death spiral’ – bank shares fall as much as 50%
Sudden the collapse of the Silicon Valley bank has sent financial markets into a frenzy as experts warn that it may not be a one-off and a preparation for the next domino to fall.
California regulators closed the bank on Friday after deposits piled up pushed it into crisis, causing the largest US bank failure since the Great Recession of 2008.
The ripple effect has already affected similar institutions such as New York’s Signature Bank, whose shares fell 23 percent before trading was halted when news of SVB’s demise broke.
The First Republic share priceAmerica’s 16th-largest bank, also tumbled 14.8 percent, while Pac West fell 37.9 percent.
San Diego State University finance professor Dan Roccato warned that while SVB is a “niche bank,” more firms are likely to face troubling times.
“I don’t think we’re necessarily going to get back to where we were in 2008, but these things are not disposable,” he said Fox News. “I suspect we’ll see a few more of these things creep in.”
Silicon Valley Bank had 17 branches in California and Massachusetts that will reopen Monday under the supervision of the FDIC National Deposit Insurance Bank in Santa Clara
Wall Street traders are in overdrive as markets are hit by the biggest US bank failure since the Great Recession of 2008
SVB shares fell 44% in premarket trading after the turmoil. It has fallen about 60% in the previous session, and investors are concerned about the strength of its balance sheet
The monumental collapse of Silicon Valley Bank was the second largest bank failure in US history.
Its demise on Friday, which left customers fearing the loss of deposits totaling tens of billions of dollars, was eclipsed only by the collapse of Washington Mutual in 2008, which had $307 billion in assets when it was placed into receivership.
SVB was more niche, specializing in backing technology startups, and its reliance on a small corner of the economy put it at greater odds with the struggling US economy than its larger rivals.
But once news of SVB’s collapse broke, the equally intertwined companies needed to act quickly.
Investors in other regional banks, such as First Republic Bank, quickly jumped in, sending the companies’ shares up 50 percent on Friday before recovering to 14.8 percent at the market close.
PacWest Bancorp was also among the banks feeling the heat, down 37.9 percent by late Friday.
And the impact extends beyond Wall Street. For example, streaming giant Roku says 26 percent of its cash reserves — more than $480 million — are tied up in SVB.
As of Saturday, the company’s shares had fallen more than 42 percent since this time last year, despite bosses insisting they can pay their bills.
In 2021, with interest rates close to zero and easy money flooding the economy, venture capital investment in startups rose to a record $671 billion in the U.S., according to KPMG.
It also meant a boom in business for SVB, as new bank customers increased their deposits with the bank, which are expected to roughly double in 2021.
These deposits helped SVB aggressively expand its loan portfolio. But as Professor Rokata explained, the bank’s inability to cover its costs amid rising interest rates has led it into a “death spiral”.
In a letter to investors on Wednesday, SVB CEO Greg Becker insisted the bank remains “well capitalized, with a high-quality liquid balance sheet and the highest capital ratios.”
University of San Diego finance professor Dan Roccato, pictured, said the bank’s inability to cover its costs amid rising interest rates had sent it into a “death spiral”.
Shares in New York-based Signature Bank plunged 23 percent after trading was halted earlier in the day following SBV’s collapse
Pacific Western Bank is among the financial institutions hit by the market crash
First Republic, America’s 16th largest bank, fell 50 percent on Friday.
While SVB was only one-eighteenth the size of JPMorgan Chase, the fall of the $209 billion-asset market player was still a major blow across the board.
The stock prices of Wall Street’s five biggest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — fell days before SVB collapsed, sparking widespread concern.
Bank of America, which serves about 67 million customers, has seen its stock drop 11.8 percent in the past week alone.
However, experts are confident the big players can weather the storm.
Meanwhile, startups, the backbone of the now-defunct SVB, suddenly found themselves struggling to make ends meet.
“It hurts a lot. It can have very negative consequences: microeconomic damage, damage to social well-being,” said Karen Petrou, managing partner of the Washington-based consultancy Federal Financial Analytics. The Washington Post.
“People can suddenly find themselves in a creek.”
Rippling, a staffing company that handles, among other assets, payroll for other agencies, said it could not immediately pay its clients’ employees due to market turmoil.
The firm’s CEO, Parker Conrad, said on Twitter that employees who depend on its systems have not been paid on time, including employees who have accounts with the largest US bank, JP Morgan Chase.
“Funds will be credited to their accounts today,” he said on Friday.
“Some other banks will process payments overnight and staff will see the payments on Saturday morning. All other employees will be paid early Monday morning.”
In his apology, Konrad added that Rippling would reimburse workers who were charged overdraft fees as a result of SVB’s collapse.
The recent increase in interest rates by the Federal Reserve was cited as one of the reasons for the collapse of SVB. Pictured: Federal Reserve Chairman Jerome Powell
Some have blamed the turmoil on the Federal Reserve, which has been raising interest rates sharply since last year in an attempt to fight inflation.
But the hope that higher borrowing costs would slow the economy enough to lower prices also put more speculative investors at risk.
And while it has also invested heavily in US Treasuries, as many banks do, rising interest rates meant SVB was unable to cover its books when push came to shove this week.
This led to SVB’s startup client base taking out their accounts faster than expected to cover costs, leaving a giant hole in the firm’s books.
SVB revealed on Wednesday that it had been forced to sell its bonds at a loss of $1.8 billion in the face of a cash burn due to shrinking deposits. The bank announced plans to raise $2 billion from investors to cover the shortfall.
To protect insured depositors, the FDIC created the Santa Clara National Deposit Insurance Bank (DINB).
When the bank was closed Friday, the FDIC immediately transferred all of Silicon Valley Bank’s insured deposits to DINB.
Beginning Monday, Silicon Valley Bank’s head office and all branches will reopen under DINB supervision.
“Banking will resume no later than Monday, March 13, including online banking and other services. Silicon Valley Bank official checks will continue,” the FDIC said in a statement.
Customers with accounts in excess of $250,000 insured should contact the FDIC toll-free at 1-866-799-0959.