The Silicon Valley Bank (SVB) bankruptcy is the largest bank failure since the 2008 crisis and one of the largest in US history.
bank failure Silicon Valley Bank (SVB)The U.S. stepped in after two straight days of stock market crashes due to deep financial troubles will affect the entire sector both outside and inside the US this Friday and may constitute the prelude to a new crisis for some investors. It aroused fear that .
Shares of SVB, a bank focused primarily on tech and science start-ups, plunged 60% on Thursday and halted trading after falling another 68% on Friday.
The California Department of Financial Protection and Innovation, home of the bank, then took control of the company, claiming lack of liquidity and insolvency to protect government-insured deposits.
With approximately $209 billion in assets and approximately $175.4 billion in deposits as of December 31, 2022, SVB’s bankruptcy is the largest bank failure since the 2008 financial crisis and one of the largest in U.S. history. .
The sudden bankruptcy of a company based in Santa Clara, California, has sparked mixed reactions among investors.
On the one hand, those who see this event as a warning of a new financial crisis, and on the other, those who blame their failures on problems that concern the company itself and do not extend to the industry or the rest of the economy. . .
“Rising interest rates are slowing the economy, which is putting pressure on the U.S. economy,” said Lauren Goodwin, an economist at New York Life Investments, quoted by The New York Times.
“What’s happening in the banking sector shows that investors fear what will happen to the rest of the economy if interest rates continue to rise,” Goodwin said.
The Origin of the Silicon Valley Bank Problem
The SVB had invested the excess liquidity achieved during the covid-19 crisis in long-term government bonds, assets that were hit by rising interest rates backed by the Federal Reserve.
Banks were ill-positioned to deal with rising interest rates and slowing loan growth, according to MarketWatch.
The bank has focused on extending loans and attracting deposits from venture capital firms, and on March 8, customer cash outflows remained high and continued to rise in February, resulting in a “deposit expected fell below”.
Faced with this situation, the company on Wednesday announced the sale of about $21 billion of assets from its portfolio (bonds) and plans to raise about $2.25 billion after losing $1.8 billion. to compensate for the loss.
According to various specialized media outlets, the purpose of the SVB is to grow its assets and “take advantage of the potential for short-term interest rate increases, partially block funding costs, and increase net interest income (NII) and net interest spread (NIM). ) to be better protected”. ) to improve profitability. ”
But the drop caused by the sale, combined with the fact that several investment advisory firms have encouraged start-ups to withdraw capital from banks, doubled the pressure on the entity that stepped in this morning. .
Spread to other banks
Its decline has affected the rest of the financial sector in the United States and abroad, in addition to causing concern among investors.
Yesterday, several financial institutions, including Signature Bank, First Republic Bank and Western Alliance, were dragged out and suspended from the stock market due to the decline.
Investors are punishing companies for betting on potentially difficult trades, such as PacWest Bancorp, which fell more than 30% today, according to The Wall Street Journal.
Both the latter and First Republic have focused their loan portfolios on the real estate sector, and in part on venture capital firms as well.
Similarly, specialty channel CNBC assured investors that they are watching institutions that have opted for long-term government bonds like SVB.
Major US financial institutions were also affected, including JPMorgan Chase, which fell 5% yesterday, and Goldman Sachs, whose title fell 2%. stable.
JPMorgan Chase rebounded 1.68%, Bank of America fell 0.61%, Citigroup fell 0.39%, Wells Fargo rose 0.67%, US Bancorp (-3.78%) and Goldman Sachs (-3.41) %) recorded significant declines.
European financial institutions also suffered heavy losses last Friday due to the SVB crisis.
In Spain, Banco Sabadell and Banco Santander suffered losses of more than 5%. In the London stock market, HSBC, Europe’s first bank by capitalization, also fell more than 5%, along with Barclays. Meanwhile, in Frankfurt, Deutsche Bank fell more than 7% of his, while Commerzbank fell about 2.5%.