The recent collapse of Silicon Valley Bank (SVB) has sent ripples through the bond-laden US financial sector, raising concerns over the value of billions of dollars in Treasury bonds held in bank portfolios around the country. SVB Financial Group, which does business as Silicon Valley Bank and lends money to tech start-ups, is attempting to raise around $2.25 billion in new equity, including a convertible stock issue, to shore up a $1.8 billion hole in its balance sheet caused, in part, by losses in a $21 billion Treasury bond portfolio.
Update: SVB Bank Closed by Regulators
The group has also noted an eroding deposit base, given the marked slowdown in venture capital markets, as well as ongoing pressure on its profit margins linked to the impact of relentless central bank rate increases. SVB’s first quarter ‘on-balance-sheet’ deposits were down around $5 billion from the three months ending in December, while average client funds were down by around $15 billion.
SVB’s collapse has ignited fears of contagion across the US financial sector, with a key benchmark of shares falling 7%, the most since June of 2020, and the S&P 500 banks index slumping 6.6% to mid-October lows. The affect of SVB’s deposit base decline was exacerbated, in part, by losses in SVB’s Treasury portfolio, which has been declining in value for much of the year amid the Federal Reserve’s ongoing rate hikes, which have lifted the Fed Funds rate from around 0% last year to its current rate of 4.5%.
Also Read : Details of the SVB crises
It’s Not only SVB at risk.
This condition was highlighted as a potential banking system risk by Carl White, a senior vice president for supervision at the St. Louis Fed, who put the value of high-rated bond holdings, mostly mortgage-backed securities and Treasuries, at around 25% of bank-sector assets. In a blog post published last month, just as Treasury yields began to climb following hotter-than-expected inflation data and the blowout January jobs report, White warned that while rising rates could support margins on bank loan books, “they also could increase the cost of liabilities and decrease the value of investment securities held as assets.”
“Even unrealized losses in investment portfolios can have negative effects on liquidity and present funding challenges, earnings pressures, and, in some cases, issues with capital,” White said. “Other possible consequences of significant unrealized losses include reductions in or restrictions on borrowing capacity and declining market valuations of the affected institutions, which could have a negative impact on banks looking to engage in merger and acquisition activities.”
The decline in SVB’s deposit base was also due to losses in the bank’s Treasury portfolio, which has been declining in value for much of the year. This decline was due to the Federal Reserve’s ongoing rate hikes, which have lifted the Fed Funds rate from around 0% last year to its current rate of 4.5%. Bank of America’s closely-tracked Flow Show report put the year-to-date decline on government bond portfolios at around 1.3%, thanks in part to the 290 rate hikes executed by global central banks over the past year.
With venture capital markets largely frozen, new lending in the doldrums, SVB was unable to take advantage of the net interest margin advantage offered by higher interest rates, and cautioned earlier this week that net interest income is likely to decline in the mid-30% range from last year’s levels, nearly double its prior decline forecast, and lowered the revenue guidance from its securities business.
SVB CEO’s Stand
According to reports, SVB Financial Group CEO, Gregory Becker, is urging investors to support the capital increase to shore up the bank’s balance sheet. The bank is attempting to raise around $2.25 billion in new equity, including a convertible stock issue, to address the $1.8 billion hole in its balance sheet caused by losses in its Treasury bond portfolio.
It is unclear if the capital increase will be successful, but SVB Financial Group’s management team is working hard to restore investor confidence. In addition to urging investors to support the capital raise, the bank has been providing regular updates on its financial position and plans to address its liquidity and funding challenges.
SVB Financial Group’s management team is also working to address the bank’s eroding deposit base, which has been impacted by the slowdown in the venture capital market. The bank has been diversifying its deposit base, with a focus on attracting commercial banking customers, and has been reducing its reliance on venture capital clients.
In addition to these efforts, SVB Financial Group is exploring strategic options to address its funding and liquidity challenges. The bank is reportedly considering selling some of its loan portfolios to free up capital and improve its liquidity position.
Overall, SVB Financial Group’s management team is taking a proactive approach to address the bank’s challenges and restore investor confidence. While there are still uncertainties regarding the bank’s financial position, its management team is taking steps to address these issues and position the bank for long-term success.
The situation at SVB has raised fears of contagion across the U.S. financial sector, with the S&P 500 banks index slumping 6.6% to mid-October lows. The decline in SVB’s deposit base and losses in its Treasury portfolio have highlighted the potential risk posed by unrealized losses in investment portfolios. Even unrealized losses can have negative effects on liquidity and present funding challenges, earnings pressures, and issues with capital.
The situation at Silicon Valley Bank (SVB) has raised concerns of contagion across the U.S. financial sector, as the bank attempts to raise around $2.25 billion in new equity to shore up a $1.8 billion hole in its balance sheet caused by losses in a $21 billion Treasury bond portfolio. The liquidity crunch triggered an emergency capital increase and raised concerns for the value of billions in Treasury bonds held in bank portfolios around the country. The SVB slump ignited worries of contagion across the U.S. financial sector, with a key benchmark of shares falling 7%, and the S&P 500 banks index slumping 6.6% to mid-October lows.
Also Read: 7 Lessons Learnt from SVB Crises
The lessons learnt from this situation are that banks need to be cautious in their investments, and should not rely heavily on one particular asset class for their portfolio. They should diversify their portfolio to manage risks and avoid being exposed to a single asset class. Banks should also ensure that they have adequate liquidity and capital to absorb potential losses in case of adverse market conditions. Moreover, banks should regularly stress-test their portfolios and assess the impact of potential market shocks to ensure that they are well prepared to handle adverse situations. Finally, regulators should monitor banks’ investments and ensure that they are complying with the guidelines on capital adequacy and risk management.
SVB Financial Group, also known as Silicon Valley Bank, is reportedly exploring options for a sale after its attempt to raise capital through a stock sale failed. This news comes amid a crisis at the tech-heavy lender that has sent shockwaves through global markets and impacted banking stocks. SVB’s shares were halted on Friday after a premarket plunge of up to 66%, and the company has not yet commented on the situation.
The situation at SVB has highlighted the potential risks associated with investing in tech-heavy companies and the importance of properly managing risk in the financial sector. It also serves as a reminder that even well-established companies can face financial challenges and must be prepared to adapt and seek solutions when necessary. The ultimate outcome of SVB’s situation remains uncertain, but it is clear that it has raised concerns across the financial sector and underscores the need for vigilant risk management and contingency planning.
Overall, the situation at SVB underscores the importance of maintaining a diversified portfolio and being mindful of the potential risks posed by rising interest rates. Banks and other financial institutions should be vigilant in managing their investment portfolios and maintaining adequate levels of liquidity to weather unexpected market conditions.