Do you want to know about the Silicon Valley bank crisis? It is a major US bank which lost sixty percent of its value in a single day and another 20 percent in the next few hours after the trading closed. When I researched, the reports stated that this incident made the entire US stock market tremble. As a result of this particular unfortunate happening, the Indian tech stock market crashed. Now let us discuss if this new banking crisis is as severe as the 2008’s Lehman Brothers meltdown. The 2008 mishap sent shockwaves throughout the global economy. In this article, let us discuss in detail the Silicon Valley Crisis.
Everything You Need to Know About the Silicon Valley Crisis
Silicon Valley Bank, also known as SVB in short, has grown to be one of the largest banks since 1852. A few points to remember about the bank include:
- They handle over half of the United States’ funds.
- They have a group of enterprises which serves as a major component in helping it to top the lenders list for IT firms and startups.
- 56 percent of their worldwide assets were invested in private equity and venture capital funds, as per 2022 reports.
- They offer a variety of services to the private equity and venture capital industries with the assistance of high-net-worth individuals.
Did you know that the Silicon Valley bank’s shares plunged after a loss of 1.8 billion dollars on the sale of 21 billion dollars in AFS (Available for Sale) securities? The bank started raising additional stock and debt funding in the amount of 2.25 billion dollars. What happened after that? Investors then started worrying about the liquidity crisis due to these actions. The stock price of the bank dropped as a result of investor anxiety.
The majority of the Silicon Valley bank’s investments produced average returns of 1.79%. This happened to be less than the current bond rate of around 3.9% on the ten-year US Treasury. Eventually, as the US Federal Reserve raised the interest rates, the bond value began to decline. Investors purchased risk-free bonds from the Fed for a greater interest rate instead of investing in the bonds. Thus, you should understand that the defeat wasn’t totally unexpected.
In addition to all the other things, the startups to those for whom the financial institution had extended credit continued to incur a massive capital burn, double of what it was before the covid. Most of these new businesses also haven’t adapted to the new economic realities, which has led to a decline in fundraising. Because of this, doubts have been cast on whether or not these companies can sustain profitable operations and fulfill their obligations.
Silicon Valley Bank has had its credit ratings lowered by a third-party agency. The bank took another hit when Moody downgraded SVB’s credit rating. Bank deposit and issuer ratings for Silicon Valley Bank in local currency were lowered from A1 to Caa2 and Baa1 to C. Moody downgraded the bank’s rating due to growing worries about the institution’s funding, liquidity, and profitability. It has been noted that the corporation is increasingly relying on deposits with higher interest rates and on brief borrowings to fulfill its obligations. The bank faces possible liquidity issues with an unrealised loss of around US$15 billion posted against its holdings in the held-to-maturity securities.
An Overview of Disruptions in Transaction Banking & the Impact on Tech Stocks
A loss of trust and stability in the financial sector can have far-reaching effects, including the transaction banking industry, even if a single bank fails. Many of the hypothetical symptoms have become manifest, and among these are:
Lack of Faith and Conviction
Investors and customers may become unlikely to participate in dealings with other banks if they lose faith in the banking industry as a whole due to a bank failure.
Systemic Threat
The systemic threat arises when the failure of one financial institution threatens to bring down other financial institutions in a domino effect. It is more likely to happen if the bankrupt bank has extensive interbank ties or access to different financial institutions.
Market Turbulence
In the event of a bank failure, investors may respond by selling off their holdings to financial institutions, causing market volatility and uncertainty.
Regulatory Intervention
More regulatory scrutiny and stronger regulations and rules for the whole sector may be necessary to respond to the consequences of a bank collapse.
Disruption to Payment Systems
Transaction banking may be disrupted, which could have repercussions for customers who had transactions with the failing bank or use other financial institutions to complete their monetary transactions.
Also Read: The Rise and Fall of Wirecard: An Analysis of the Corporate Scandal
All About the Art of Balancing Pressures in Tech Stock Investing
There is a double impact on the standard banking system: With fewer deposits, less money is available to lend to borrowers. Meanwhile, the bank’s operating expenses have increased. Investors may be hesitant to put money into the company if margins are under stress. SVB’s most recent financial results show that the business financed about 50 percent of the venture-backed technology and life science firms and much more than 40 percent of VC-backed tech IPOs. It allocates 39 percent of its worldwide fund banking portfolio to technology and 3 percent to Fintechs. This is a testament to SVB’s size and reach and what it predicts for Fintech funding and tech startups.
SVB’s position as the preferred financial services provider for such corporations and the funds that support them could be a mixed blessing. According to a recent survey by PYMNTS, publicly traded FinTech companies have lost around half of their value since the outbreak. These Fintechs will find it more difficult to go public with new listings, to obtain private money, etc. Furthermore, 71 percent of every FinTech IPO since 2020 has been for companies that have worked with SVB, and the firm has received 3.8 billion dollars in loan commitments.
VC fund Founders Fund, which Peter Thiel co-founded, advised corporations to pull money out of SVB, as reported by outlets like Bloomberg. When PYMNTS featured Silicon Valley Bank a little over a year ago, the bank’s worldwide head of digital services, Milton Santiago, was quoted as saying that they had the most demanding clients in the world as they are the creators who devote their life to altering how people conduct business. This type of warning might cause panic and lead to bank runs.
The Bottomline
The SVB crisis is a devastating example of the knock-on consequences that global disasters can have on local markets and companies. Many investors are still struggling from the fallout of this crisis. Long-term investors might take advantage of the current uncertainty by acquiring high-quality equities at a discount. The collapse of American markets, says many analysts, could be a purchasing opportunity for those willing to ride out the brief volatility in search of long-term returns.