Shares of SVB Financial Group, SIVB, were sold by investors for a -60.41% decline; red downward-pointing triangle and a number of U.S. banks following the tech-focused lender’s announcement that it lost nearly $2 billions selling assets as a result of a larger-than-anticipated drop in deposits.
Thursday, the market value of the four largest U.S. banks decreased by $52 billion. Since the pandemic wreaked havoc on the markets nearly three years ago, the KBW Nasdaq Bank Index experienced its largest decline ever. After revealing the loss and attempting to raise $2.25 billion in fresh capital through the sale of new shares, the parent company of Silicon Valley Bank, SVB, saw its shares fall by more than 60%.
Both large and small banks reported sharp declines. First Republic Bank lost 17% and PacWest Bancorp lost 25%. U.S. Bancorp lost 7%, while Charles Schwab Corp. lost 13%. JPMorgan Chase & Co., the largest bank in America, lost 5.4%.
The debacle on Thursday is yet another repercussion of the Federal Reserve’s ferocious effort to maintain inflation under control. Existing bonds with lower payouts have seen their value decline as a result of rising interest rates. Many of these bonds, including Treasurys, are held by banks, which are currently sitting on huge unrealized losses.
Banks don’t usually have a problem with big drops in value unless they have to sell assets to pay for deposits. Despite the fact that customers are beginning to move their deposits into alternatives with higher yields, the majority of banks are not doing so. However, this week, a few banks have encountered difficulties, raising concerns that other banks may be forced to take losses in order to raise cash.
SVB stated late on Wednesday that it would record an after-tax loss of $1.8 billion from investment sales and would like to raise $2.25 billion through the sale of a mix of common and preferred stock.
In 2021, SVB invested a significant portion of the increase in assets and deposits in U.S. Treasurys and other government-sponsored debt securities. The Fed began raising rates shortly thereafter. Silicon Valley Bank’s service to tech start-ups and venture capital firms was harmed as a result, prompting a faster-than-anticipated drop in deposits that is still gaining momentum.
Some funding financial backers have encouraged new companies to haul their cash out of SVB, refering to liquidity worries, as per individuals acquainted with the matter.
Y Combinator’s president, Garry Tan, sent the following internal message to the program’s founders: We don’t know anything specific about what’s going on at SVB. However, if you hear of problems with a bank’s solvency and believe it, you should take it seriously and put your startup’s interests ahead of your own by not taking on more than $250,000. As usual, your startup passes on when you hit a financial dead end for reasons unknown.”
According to people familiar with the situation, SVB Chief Executive Greg Becker attempted to reassure customers regarding the bank’s financial health during a call on Thursday. According to the individuals, Mr. Becker advised them not to withdraw their deposits from the bank and not to incite fear or panic regarding its situation.
One of the most extreme instances of deposit flight is the demise of Silvergate Capital Corp., one of the leading banks in the cryptocurrency market. The crypto meltdown sparked a deposit run, forcing the California bank to sell billions of dollars’ worth of assets at a steep loss, and it announced on Wednesday that it would close.
Bill Smead, chairman and chief investment officer of Smead Capital Management, a $5.5 billion company that owns Bank of America Corp. and JPMorgan, stated, “This is the first sign there might be some kind of crack in the financial system.” Individuals are awakening to the gravity that this was one of the greatest monetary happiness episodes.”
If banks are able to hold onto their bond portfolios until maturity, they do not suffer losses. However, according to accounting standards, they are required to include the realized losses in their earnings if they suddenly have to sell the bonds at a loss in order to raise cash.
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