Financial Crisis of Silicon Valley Bank (SVB) Share fall 60% Causes, Consequences, and Lessons Learned

On March 9, 2023, Silicon Valley Bank (SVB) announced a $1.75 billion share sale to shore up its balance sheet and navigate declining deposits from startups struggling for funds amid increased spending. The bank lost $1.8 billion in the sale of U.S. treasuries and mortgage-backed securities that it had invested in, owing to rising interest rates. The bank is also contending with shrinking customer deposits, given that its customer base of largely startups has far less money right now to park at a financial institution.

Update: SVB Bank Closed by Regulators

SVB’s shares plunged more than 62% on Thursday, its biggest loss in 25 years, after it announced the share sale. The bank’s CEO, Greg Becker, said that cash burn by clients increased in February, and the funding winter is a fallout of a relentless increase in borrowing costs by the Federal Reserve over the last year as well as elevated inflation.

SVB is a crucial lender for early-stage businesses, and is the banking partner for nearly half of U.S. venture-backed technology and healthcare companies that listed on stock markets in 2022. The SVB turmoil raised investors’ concerns about broader risks in the sector. Shares of First Republic, a San Francisco-based bank, sank more than 16.5%, becoming the second-biggest decliner in the S&P 500 index.

The bank’s announcement backfired as it issued it just as the crypto bank Silvergate was announcing that it was winding down operations. SVB’s apparent goal was to project that the bank was being conservative and raising this money to stabilize itself. However, the messaging was not well received by the market, and the bank’s shares continued to decline. It is unclear at this time who will step in and acquire Silicon Valley Bank, but it is likely that conversations are happening right now about potential rescues.

Performance of SVB share price

SVB Financial Group’s stock performance has been negatively impacted by the crisis it is facing. As mentioned earlier, the stock fell by 18% in one day post hours (March 9th, 2022) due to reports that venture funds were telling companies to back away from the bank. The stock had also fallen by around 60.4% intra-day on the same day.

Silicon Valley Bank’s shares have fallen by over 80% due to a messaging blunder, and is now in danger of being acquired by another bank. The bank lost $1.8 billion due to the sale of US treasuries and mortgage-backed securities, as well as shrinking customer deposits. As a result, it planned to sell $1.25 billion of its common stock, $500 million in convertible preferred shares, and $500 million of its common stock to the private equity firm General Atlantic.

The bank was attempting to portray itself as being conservative by raising money to stabilize itself. However, the announcement came at the same time as Silvergate Bank announced that it was winding down operations, leading to concerns for investors.

Main Business of SVB

SVB Financial Group is a financial services company that primarily serves the technology, life science, venture capital, and private equity industries. The company offers a range of banking and financial services, including deposit products, loans, cash management, payment and foreign exchange services, and investment advisory services.

One of the main focuses of SVB Financial Group is working with startups and high-growth companies in the technology and life science industries. The company provides financing and other banking services to help these companies grow and succeed. SVB Financial Group also offers specialized services for venture capital and private equity firms, including fund banking, which involves providing banking services to funds and their portfolio companies.

Reason of early success of SVB

The main reason for the early success of SVB Financial Group can be attributed to its focus on a niche market – the technology and innovation sector – which was an underserved market at the time of the bank’s founding in the early 1980s. By catering to the unique financial needs of startups and emerging technology companies, SVB was able to establish itself as a trusted partner and advisor within this community, building long-lasting relationships that helped to fuel its growth.

Additionally, the bank’s innovative approach to lending, which emphasized the potential of a company’s technology and intellectual property over traditional measures of creditworthiness, allowed it to provide much-needed capital to these companies when traditional banks were hesitant to do so.

Reason for Present crises in SVB

As provided above, SVB Financial Group is currently facing a crisis due to its exposure to the new venture companies burning cash heavily and High deposit rates is to be given to its majority of clients deposited at floating rates. which resulted in significant losses for the bank. The bank lost $1.8 billion due to the sale of US treasuries and mortgage-backed securities, as well as shrinking customer deposits.

Additionally, the bank is seeking to raise $2.25 billion in equity after selling securities at a loss to shore up its balance sheet, which has led to concerns about the bank’s financial stability. Finally, there have been reports that some venture funds are telling companies to back away from the bank, which could potentially harm its future business prospects. All of these factors have contributed to the bank’s current crisis.

Impact on Other Banks

On March 8, 2023, SVB Financial Group sold $21 billion in securities for a loss of $1.8 billion, which triggered a dilutive capital raise of $2.25 billion. The bank attributed its decision to reposition and enhance profitability by increasing asset sensitivity, taking advantage of higher short-term rates, partially lock-in funding costs, and protecting net interest income (NII) and net interest margin (NIM).

However, the movement of SVB’s net interest margin over the past year indicated that the bank was not well-positioned for the combination of rising interest rates and slowing loan growth in the venture capital space. As a result, it had to raise more capital, which led to a sharp decline in its shares, affecting the whole banking industry. SVB’s troubles may also put other banks at risk. A list of 10 banks that may face trouble due to similar red flags, including contracting net interest margins, or smaller expansions of margins, was provided by MarketWatch.

Here are the 10 banks listed in the article that may face trouble in the wake of the SVB Financial Group debacle:

1. Customers Bancorp Inc. (CUBI)
2. First Commonwealth Financial Corp. (FCF)
3. First Financial Bankshares Inc. (FFIN)
4. First Foundation Inc. (FFWM)
5. Flushing Financial Corp. (FFIC)
6. Franklin Financial Network Inc. (FSB)
7. Independent Bank Corp. (INDB)
8. Meta Financial Group Inc. (CASH)
9. Seacoast Banking Corp. of Florida (SBCF)
10. Sterling Bancorp Inc. (STL)

Lesson Learned from SVB Crises

Lesson learned from the crisis at SVB: (Read 7 lesson from SVB crises in details Here)

1. Diversify investments: SVB’s over-reliance on a specific customer base led to a crisis when these customers faced financial difficulties. Diversifying investments could have reduced the impact of this crisis.
2. Timing and messaging: SVB’s share sale announcement was poorly timed, coming just as another bank was winding down operations. Additionally, the messaging of the announcement was not well received by the market, leading to a decline in the bank’s shares.
3. Risk management: SVB’s exposure to startups and early-stage businesses meant that it was more susceptible to financial difficulties faced by these companies. Implementing effective risk management strategies could have reduced the impact of the crisis.
4. Niche market focus: SVB’s early success was due to its focus on a niche market, but this same focus may have made it more vulnerable to market shifts and changes.
5. Capital adequacy: SVB’s crisis highlights the importance of maintaining adequate capital reserves to weather financial storms.
6. Reputation management: Negative reports and rumors can harm a bank’s reputation and future business prospects, emphasizing the importance of maintaining a positive image in the market.
7. The importance of monitoring macroeconomic factors: The Federal Reserve’s increased borrowing costs and elevated inflation impacted SVB’s customer base, leading to a funding winter and increased cash burn by clients. Staying informed of macroeconomic factors can help banks anticipate and mitigate potential crises.

Conclusions

In summary, SVB Financial Group has faced multiple challenges that have adversely affected its financial performance. Although the company has taken steps to address these issues, there remains a reasonable doubt about its ability to fully recover from the crises.

One significant challenge that SVB Financial Group faces is loan losses. The company’s exposure to high-risk industries has resulted in a high rate of loan defaults, which has put significant pressure on the company’s balance sheet. Additionally, the recent economic downturn and its impact on the broader market have further increased the risk of loan losses.

Another challenge is the company’s high deposit rates,, which have put pressure on its net interest margin. As a result, the company has had to seek additional capital to maintain its liquidity position and fund its operations.

While the company has taken steps to address these challenges, there remains a reasonable doubt about its ability to fully recover from the crises. The success of the company’s restructuring efforts and its ability to raise capital will depend on a variety of factors, including the strength of the broader economy and the level of investor confidence in the company’s ability to execute its strategy.

However, the company has taken several steps to address these challenges, including restructuring its loan portfolio, reducing exposure to high-risk industries, and seeking to raise capital to shore up its balance sheet. It remains to be seen how successful these measures will be in restoring the company’s financial health and investor confidence.

In conclusion, while SVB Financial Group has a track record of success in supporting the innovation economy, its ability to overcome the challenges it currently faces is uncertain. Investors should carefully evaluate the company’s financial health and growth prospects before making any investment decisions.