Shares in financial institutions and banks around the world have been under stress after Silicon Valley Bank (SVB) said it plans to shore up its finances, the announcement lead to a crash in its own shares.
The effect of the Silicon Valley Bank (SVB) announcement saw the four largest US banks losing more than $50bn in market value.
The ripple effect traveled to other financial institutions around the world; bank shares in Asia and Europe fell sharply on Friday. In the UK, HSBC shares fell 4.8% and Barclays dropped 3.8%.
Silicon Valley Bank – SVB’s shares saw their biggest one-day drop in value on record on Thursday as they crashed by over 60% and eroded another 20% in after-hours trade.
The loss came a day after the bank announced a $2.25bn (£1.9bn) share sale to boost its finances.
SVB launched the share sale after it lost about $1.8bn when it offloaded a portfolio of assets, which comprised mainly of the United State’s government bonds.
The loss to Silicon Valley Bank (SVB), a key lender to technology start-ups raised fears about the continuity of support and financial standing of the bank, with some start-ups who have money deposited with them been advised to withdraw funds.
Hannah Chelkowski, founder of Blank Ventures is advising companies in her portfolio to withdraw funds.
“It’s crazy how it’s just unravelled like this. The interesting thing is that it’s the most start-up friendly bank and supported start-ups so much through Covid. Now VCs are telling their portfolio companies to pull their funds,” she said to BBC.
Silicon Valley Bank (SVB) is a major lender for early-stage businesses. It is the banking partner for almost half of US venture-backed technology and healthcare companies that were listed on stock markets last year.
There were concerns about the value of bonds held by banks as rising interest rates made those bonds less valuable.
Central banks around the world – including the US Federal Reserve and the Bank of England – have sharply increased interest rates as they try to manage rising inflation.
Banks mostly hold large portfolios of bonds and risk getting significant potential losses from them. The crash in the value of bonds held by banks is not necessarily a problem unless they are forced to sell them.
But, if banks like Silicon Valley Bank, have to sell the bonds they hold at a loss it could have an impact on their profits.
According to Ray Wang, founder, and chief executive of Silicon Valley-based consultancy Constellation Research, “The banks are casualties of the hike in interest rates.”
“Nobody at Silicon Valley Bank and in a lot of places thought that these interest rate hikes would have lasted this long. And I think that’s really what happened. They bet wrong,” he added.
Looking at the chain of events, Russ Mould, investment director at AJ Bell, opined that the ripple effect of the problems at Silicon Valley Bank (SVB) showed these sorts of events “often hint at vulnerabilities in the wider system”.
