Financial markets prepare after Silicon Valley Bank’s ‘death spiral’: bank shares fall up to 50%
The sudden collapse of Silicon Valley Bank has sent financial markets into a frenzy as experts warn it may not be a “one off” thing and set up for the next domino to fall.
California regulators shuttered the bank on Friday after a run on deposits plunged it into crisis, sparking the biggest US bank failure since the Great Recession of 2008.
The ripple effect has already affected similar institutions, such as Signature Bank of New York, which saw its share price plunge 23 percent before trading was halted when news broke of SVB’s demise.
The share price of First Republic, the 16th largest bank in the United States, also plunged 14.8 percent and Pac West fell 37.9 percent.
University of San Diego finance professor Dan Roccato warned that while SVB was “a niche bank,” more companies are likely to face tough times ahead.
“I don’t think we’ll necessarily go back to where we were in 2008, but these things are not unique,” he said. foxnews. ‘My suspicion is that we’re going to see some more of these things stealthily.’
Silicon Valley Bank had 17 branches in California and Massachusetts, which will reopen Monday under the control of the FDIC’s Deposit Insurance National Bank of Santa Clara.
Wall Street traders were sent into overdrive when markets were hit by the biggest US bank failure since the Great Recession in 2008.
SVB shares fell 44% in premarket trading after the turmoil. It plunged around 60% in the previous session, and investors were worried about the strength of its balance sheet.
The monumental fall of Silicon Valley Bank is the second largest banking collapse in the history of the United States.
Its demise on Friday, which has left clients fearful of losing deposits totaling tens of billions of dollars, is dwarfed only by the 2008 bankruptcy of Washington Mutual, which had assets of $307 billion when it went into receivership.
SVB was more of a niche, specializing in supporting tech startups, and its reliance on a small corner of the economy put it at greater odds with a struggling US economy than its larger competitors.
But as soon as the news came that SVB had collapsed, the similarly intertwined companies found themselves needing to act quickly.
Investors in other regional banks, such as First Republic Bank, quickly jumped ship and the companies’ share prices plunged 50 percent on Friday before recovering to 14.8 percent at market close.
PacWest Bancorp was also among the banks that felt the heat, falling 37.9 percent as of the end of Friday.
And the impact extends beyond Wall Street. Streaming giant Roku, for example, says that 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 last year, despite bosses insisting they can pay their bills.
In 2021, when interest rates were close to zero and easy money flooded the economy, venture capital investments in startups rose to a record $671 billion in the US, according to KPMG.
That also meant booming business for SVB, as new bank customers increased their deposits at the bank, which almost doubled in 2021.
Those deposits helped SVB to aggressively expand its loan portfolio. But as Professor Roccato explained, the bank’s failure to cover its costs amid rising interest rates led it into a ‘death spiral’.
On Wednesday, SVB CEO Greg Becker insisted in a letter to investors that the bank remained “well capitalized, with a high-quality liquid balance sheet and leading peer-to-peer capital ratios.”
University of San Diego finance professor Dan Roccato, pictured, said the bank’s failure to cover its costs amid rising interest rates led it into a “death spiral.”
New York institution Signature Bank saw its shares fall 23 percent after trading was halted earlier that day after SBV’s collapse.
Pacific Western Bank is among the financial institutions set to be rocked by the market collapse
First Republic, the 16th largest bank in the United States, saw its share price fall by as much as 50 percent on Friday.
While SVB was only one-eighteenth the size of JPMorgan Chase, the fall of a market player with $209 billion in assets remained a major body blow.
Widespread concern sent share prices of the five biggest Wall Street banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — plunging in the days before SVB’s collapse.
Bank of America, which serves about 67 million customers, has seen its share price fall 11.8 percent in the past week.
However, experts are confident that the big players can weather the storm.
Meanwhile, the start-ups, the foundation of the now-defunct SVB, suddenly found themselves struggling to make ends meet.
It is extremely painful. It could have very adverse consequences: microeconomic damage, damage to social welfare,’ Karen Petrou, managing partner at Federal Financial Analytics, a Washington consultancy, told the washington post.
“People could suddenly be upriver.”
Rippling, a human resources management firm that handles, among other assets, payroll for other institutions, announced that it could not immediately pay its clients’ employees due to market turbulence.
The company’s chief executive, Parker Conrad, said on Twitter that employees who relied on its systems were not being paid on time, including employees with accounts at America’s largest bank, JP Morgan Chase.
“Employees who bank with JPMorgan Chase will see funds arrive in their accounts today,” he said Friday.
‘Some other banks will process payments overnight, and employees will see payments posted on Saturday morning. All remaining employees will receive their payments early Monday morning.
In his apology, Conrad added that Rippling would reimburse workers who were charged overdraft fees as a result of SVB’s collapse.
The recent rate hikes by the Federal Reserve have been pointed to as one of the reasons for the collapse of SVB. Pictured: Federal Reserve Chairman Jerome Powell
Some have blamed the turmoil on the doorstep of the Federal Reserve, which has been raising interest rates sharply since last year in an attempt to combat inflation.
But the hope that higher borrowing costs will slow the economy enough to drive prices down also puts more speculative investors at risk.
And while it had also been heavily invested in US Treasuries, as many banks do, rising interest rates meant SVB was unable to hedge its books when the crunch came this week.
SVB’s startup client base withdrew their accounts faster than expected to break even, causing a giant hole in the company’s books.
On Wednesday, SVB revealed that faced with the loss of cash from declining deposits, it was forced to sell its bond holdings at a loss of $1.8 billion. The bank announced plans to seek $2 billion from investors to cover the shortfall.
To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB).
When the bank closed on Friday, the FDIC immediately transferred all of Silicon Valley Bank’s insured deposits to DINB.
Starting Monday, Silicon Valley Bank’s main office and all branches will reopen under DINB control.
Banking activities will resume no later than Monday, March 13, including online banking and other services. Official Silicon Valley Bank checks will continue to cash,” the FDIC said in a statement.
Customers with accounts exceeding the insured amount of $250,000 should contact the FDIC toll free at 1-866-799-0959.