Following the announcement of steps to strengthen its finances on Thursday, shares of Silicon Valley Bank (SVB), a significant lender to technology start-ups, fell sharply. The four biggest US banks lost more than $50 billion in market value as a result, which had a domino effect. On Friday, bank shares sank significantly in both Asia and Europe. HSBC shares declined 4.8% and Barclays shares dropped 3.8% among UK banks. On Thursday, SVB's shares experienced their greatest one-day decline ever when they fell by more than 60% and lost an additional 20% in after-hours trading. The decline occurred a day after the bank revealed plans to raise $2.25 billion (£1.9 billion) by selling shares.
After suffering a loss of about $1.8 billion when it sold a portfolio of assets, primarily US government bonds, SVB started the share sale. Nevertheless, what worries the bank more is that certain start-ups with money deposited have been told to withdraw money.
The situation is "crazy," Blank Ventures founder Hannah Chelkowski told. Blank Ventures is a fund that invests in financial technologies. She is encouraging the businesses in her portfolio to stop investing. "It's bizarre how it suddenly fell apart in this way. The most intriguing aspect is that it's the bank that supports startups the most through COVID and is the most startup-friendly. VCs are currently advising their portfolio companies to withdraw their funding, "She spoke.
SVB, a significant early-stage lender, is the banking partner for over half of the US venture-backed technology and healthcare companies that went public last year. Concerns regarding the value of bonds held by banks in the larger market arose from the fact that those bonds lost value due to rising interest rates.
In an effort to reduce inflation, central banks around the world, particularly the US Federal Reserve and the Bank of England, have sharply raised interest rates. Banks frequently have sizable bond portfolios, which means they are sitting on sizable potential losses. Until banks are obliged to sell their bonds, the declines in bond value are not always an issue. Yet it might affect their profits if lenders, like Silicon Valley Bank, are forced to sell the bonds they own at a loss.
"The banks are casualties of the spike in interest rates," Ray Wang, founder and CEO of Silicon Valley consulting firm Constellation Research. "Nobody anticipated that these interest rate increases would endure this long, including at Silicon Valley Bank and many other places. That, in my opinion, is what actually transpired. They placed a bad wager "Added he.
The ripple effect of the issues at SVB, according to AJ Bell investment director Russ Mould, demonstrated that these kinds of incidents "frequently hint at vulnerabilities in the wider system."
Concerns are raised by the fact that SVB's share placement was accompanied by a fire sale of its bond portfolio.
"A lot of banks have sizable bond portfolios, which become less attractive when interest rates rise. The SVB predicament serves as a reminder that many institutions retain significant fixed-income [bond] assets with unrealized losses.