The startup industry was in disarray on Thursday after a lender with limited exposure outside of Silicon Valley unleashed a panic in tech circles that drove down banking shares globally.
After a large loss on its portfolio, Silicon Valley Bank announced a share sale to strengthen its finances. After then, things started to decline quickly. What does Silicon Valley Bank actually do, and why has it caused such a stir? Here is what we currently know, along with what might occur next:
How is the Silicon Valley Bank faring?
The crisis for Silicon Valley Bank, situated in Santa Clara, started after its parent company, SVB Financial Group, declared that it had sold $21 billion worth of securities from its holdings and that it was holding a $2.25 billion share sale to strengthen its finances. According to observers, the decision was made in response to significant deposits leaving the bank as a result of a wider slowdown in the startup sector. SVB also anticipated a more drastic drop in net interest income.
All of that alarmed a number of well-known VC firms, including Peter Thiel’s Founders Fund, Coatue Management, and Union Square Ventures, which, according to sources, sent instructions to portfolio companies to restrict exposure and withdraw their funds from the bank. While some have said they will support SVB, other VC firms have requested their portfolio companies to at least move some of their funds away from the bank.
How has Silicon Valley Bank been affected?
SVB’s bonds experienced unprecedented falls, while its shares fell 60% on Thursday. Greg Becker, the chief executive officer of SVB, spoke to the bank’s clients on a conference call, including venture capitalists, and pleaded with them to “remain calm” in an effort to prevent a bank run.
How did the problems at Silicon Valley Bank grow?
The sudden closure of Silvergate Capital Corp. and the issues with SVB occurred at the same time, causing rippling effects throughout the banking sector and a decline in stock prices. A barometer of banking equities, the KBW Bank Index, fell 7.7%, the most in over three years.
Shares of major Asian banks afterwards followed their Wall Street counterparts lower as they all experienced declines of at least 5%, including Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co.
Who are the customers of Silicon Valley Bank?
As the sole publicly traded bank concentrating on Silicon Valley and tech entrepreneurs, SVB is strongly ingrained in the American startup environment. On its website, it claims to work with nearly half of all venture capital-backed businesses in the US and 44% of the tech and healthcare firms that went public in the US last year.
What might occur next?
As investors in financial firms closely monitor other banks that might potentially be impacted by the slump, startups withdrawing money are searching for other lenders where they can keep their capital. What will transpire when US markets reopen is uncertain. William Ackman, the founder of Pershing Square Holdings Ltd., has suggested a US government rescue to save Silicon Valley Bank.
What’s the worst that might happen?
The worst-case scenario for any bank is that it runs out of cash too quickly or experiences severe losses that cause its capital to be depleted, forcing authorities to wind the bank down or sell it to a more formidable competitor. But, the stock sale by Silicon Valley Bank should help to avoid that. Only time will tell.
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