SANTA CLARA, CALIFORNIA - MARCH 10: Employees stand outside of the shuttered Silicon Valley Bank ... [+]
Fallout from the troubled Silicon Valley Bank could adversely impact the job market, particularly in the venture capital, startup and cryptocurrency sectors where SVB
The saga started when SVB was confronted with the new reality of higher interest rates. SVB faced interest-rate risk on $91 billion in bonds, then announced a firesale of its $21 billion bond portfolio, incurring huge losses of around $1.8 billion, according to the Financial Times. The bank announced plans to raise around $2.3 billion in fresh capital to remain solvent and keep the doors open. Credit agencies slashed SVB's credit ratings, causing shares to tumble more than 60% on Thursday.
Meanwhile, customers were getting worried as people withdrew their money, as the Federal Deposit Insurance Corporation only covers amounts up to $250,000. If SVB were to go under, it would be the second-largest bank failure in the history of the United States.
Silvergate Capital
SI
The sudden collapse of one of the cryptocurrency market’s go-to banks, Silvergate Capital, showed what happens when depositors get worried and withdraw their money. Silvergate customers withdrew their funds from the bank, panicking over what the impact would be from the epic implosion of the once-large cryptocurrency exchange FTX in 2022. Silvergate incurred a loss of around $886 million when the financial institution sold securities as deposits left the bank. The precarious situation resulted in Silvergate closing down the bank.
Silicon Valley Bank
SVB is in discussions to sell the bank, according to CNBC. Attempts by the bank to raise capital have reportedly failed, and the bank has hired advisors to explore a potential sale. Large financial institutions are looking at a potential purchase of SVB.
Shares of SVB cratered by 80% from their record high in late 2021 because interest rates increased, harming the bank’s business model, Barron’s reported. The bank's dramatic fall in market value was attributed to its sale of assets, in response to a decline in deposits and the influx of large withdrawals.
SVB’s CEO Greg Baker called for cooler heads to prevail, as he disclosed a $1.8 billion loss and the need to raise $2.25 billion in fresh capital for the institution. He requested his venture capital, digital assets and startup clients to hold off on their withdrawals.
SVB’s challenges ramped up when the company needed to sell securities to alter its investment portfolio to re-align it with the changes wrought by the effects of higher interest rates.
The bank boasted a market value of $16.8 billion at the end of last week, and as of Thursday the bank’s market value plummeted to around $6.3 billion with expectations that the stock value will continue its decline unless measures are quickly enacted to turn around the situation.
Investors are now concerned that much larger banks may have to do the same. Shares of the giant financial institutions fell Thursday, including the largest of the major corporations: JPMorgan Chase
Investment bank Morgan Stanley
How Did This Happen?
Everything was going well until the Federal Reserve Bank started aggressively raising interest rates. This caused the value of SVB’s bond investments to plunge, as there were many other alternatives for investors to buy short-term bonds or money markets at 3% or +5% yields.
SVB announced that it had sold $21 billion of its portfolio at a loss of nearly $2 billion, and set out to raise $2.25 billion in equity and debt to keep the doors open. The sudden shift in affairs took investors by surprise.
The Fed’s inflation-fighting actions—raising interest rates—caused the value of existing bonds that offered lower-income payouts to bondholders to decrease as investors moved into higher-yielding money markets, CDs and safe treasury bills. Banks that own a large quantity of lower-yielding bonds may be subjected to their own sizable unrealized losses (the money isn’t lost until the security is sold at less than the amount it was purchased).
The FDIC, the U.S. government entity responsible for insuring deposits, conducts examinations and supervision of financial institutions to ensure safety, soundness and consumer protection, reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities amounted to a significant $620 billion as of Dec. 31, before the Fed’s rate hikes started.
The Contagion
The four biggest U.S. banks—Citigroup
A financial index that serves as a bellwether for the banking sector, SPDR S&P Regional Banking ETF, fell another 1.5% Friday following an 8% tumble on Thursday. The Financial Select SPDR Fund dropped by 1.25% following a 4% decline.
CNBC reported that Signature Bank, another financial institution adjacent to the cryptocurrency sector, plunged 12% on Thursday. First Republic Bank
On financial Twitter, there was a robust debate amongst venture capitalists, investors and startup executives. Many were calling for cooler heads to prevail and stand by SVB, as the bank was accommodating to the VCs, startups and cryptocurrency platforms. Others said it would be prudent to diversify and take some or all of the deposits out of the bank in an abundance of fiduciary caution.
What To Expect
We’ve already seen a white-collar recession precipitated by the changes brought on by high inflation, rising interest rates and costs of nearly everything going up. Sectors sensitive to rising interest rates, such as tech, startups, Wall Street and real estate, have seen extensive layoffs and hiring freezes.
In light of the uncertainty caused by a potential ripple effect emanating from the troubles at the financial institutions, companies will likely pump the brakes on hiring and bolster their downsizing plans to cut expenses. Since SVB catered to the crypto, startup and VC sectors, it's reasonable to conclude these areas will be highly impacted.
