Silicon Valley Bank suspended premarket trading in its shares on Friday pending an announcement as the bank appeared to be on the brink of bankruptcy.
Shares of SVB fell 44% in premarket trading after falling 60% in the previous session, when it revealed plans to raise more than $2bn from investors to offset $1.8bn in losses from the bond sale.
According to a CNBC report citing sources, the bank was preparing to announce on Friday morning that it was in talks for a sale after canceling plans to seek cash from investors.
The Santa Clara, California-based bank is the 18th largest bank in the US with assets of $212 billion as of September, primarily serving Silicon Valley tech startups and venture funds. .
On Thursday night, Founders Fund, the venture capital fund co-founded by Peter Thiel, advised startups to withdraw their money from Silicon Valley Bank amid concerns about its financial stability, according to Bloomberg.
Theil’s warning, and a similar alert from startup incubator Y Combinator, raised fears that a run on SVB’s deposits could drive the bank into insolvency if it could not meet customer demand for withdrawals.
SVB shares were down 44% in premarket trading, after falling 60% in the previous session, and investors were concerned about the strength of its balance sheet.
On Thursday night, Founders Fund, the venture capital fund co-founded by Peter Thiel (above), advised companies to withdraw money from Silicon Valley Bank.
It came after parent company SVB Financial Group announced a massive capital increase to cover a $1.8 billion loss on the bond sale, which the bank was forced to liquidate to cover a sharp drop in deposits.
That plan failed to calm investors who were worried whether the capital increase would be enough to cover a sharp drop in deposits.
SVB said its deposits were falling faster than expected due to increased spending by its clients, largely tech and healthcare startups, as new venture capital injections dry up due to rising bids. interest rates.
The situation also raised fears of broader market contagion, after the S&P 500 bank index fell more than 6% in its biggest one-day drop in more than two years on Thursday.
The four largest banks in the US (JPMorgan Chase, Bank of America, Wells Fargo and Citigroup) saw their share prices plunge 4-6%, wiping $52.3bn off their capitalizations collective market during the day.
In response, billionaire hedge funder Bill Ackman led calls for a government bailout for troubled SVB, which caters to Silicon Valley tech startups.
“The failure of SVB Financial could destroy a major long-term driver of the economy, as VC-backed companies rely on SVB for loans and to keep their operating cash,” Ackman wrote in a tweet.
“If private capital cannot provide a solution, a highly dilutive government-preferred bailout should be considered,” he added.
SVB revealed on Thursday that it is battling cash burns due to declining deposits from tech startups battling a drought of venture capital funds.
The company’s assets and deposits nearly doubled in 2021, with the bank investing much of those funds in US Treasuries and other government bonds.
But as rising interest rates hit tech startups the bank primarily serves, declining deposits forced SVB to sell bond holdings, which had meanwhile plummeted in market value. due to the rising rate environment.
However, SVB CEO Greg Becker insisted in a letter to investors that the bank remains “well capitalized, with a high-quality liquid balance sheet and leading peer-to-peer capital ratios.”
SVB chief executive Greg Becker insisted in a letter to investors that the bank remains “well capitalized, with a high-quality liquid balance sheet and leading peer-to-peer capital ratios.”
Billionaire hedge funder Bill Ackman led calls for a government bailout for troubled SVB, which caters to Silicon Valley tech startups.
The turmoil in SVP sparked a sell-off in pairs with similar exposure, with San Francisco-based First Republic tumbling 16.52% after hitting its lowest level since October 2020.
Falls in the massive Big Four banks, though smaller in percentage terms, dragged markets lower, with the 5.4% loss in JPMorgan weighing more than any other stock in the S&P 500.
‘The rise of Silicon Valley made everyone nervous about people’s capital levels and what deposits are doing. A lot of institutional investors don’t feel good about ownership of certain banks right now,” RJ Grant, head of trading at Keefe, Bruyette & Woods in New York, told Reuters.
“It just makes people freak out because Silicon Valley has historically been a very strong, well-run bank. If they’re having problems right now, people wonder what happens to other banks that are of lesser quality and don’t have the reputation that Silicon Valley Bank has.”
The turmoil at SVB followed testimony from Federal Reserve Chairman Jerome Powell this week, where he said the central bank would likely need to raise interest rates more than expected in response to recent inflation data.
The defeat at SVB has already sparked investor concerns about the health of other US and European banks.
The S&P 500 banking index fell 6.6% on Thursday, while a sell-off at major European lenders on Friday weighed on the region’s main indices.
“Fears about unrealized losses in banks’ bond portfolios, catalyzed by sharp declines in US bank share prices yesterday, present a buying opportunity for European banks in our view,” the analysts wrote. from Credit Suisse in a note.
Developing story, more to follow.