👍Bank Run: SVB stock price falls over 40% in pre-market after tanking 60% on Thursday | The Financial Express

Clipped from: https://www.financialexpress.com/investing-abroad/featured-stories/bank-run-svb-stock-price-falls-over-40-in-pre-market-after-tanking-60-on-thursday/3004993/

SVB could be one of the first casualties of the US Fed’s unprecedented rate hikes.

SVB announced the sale of billion of dollars in securities from its portfolio and also a share sale to shore up finances.

Investors’ primary concern is that recent reports about the Silicon Valley Bank (SVB) crisis may cause a Wall Street crash. The market is concerned about what will happen if the SVB crisis escalates and spreads to other sectors. US banking sector stocks had a sell-off yesterday with Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. all falling at least 5%.

SVB stock price plunged 60 per cent on Thursday and are trading around $86 in the pre-market session on Friday, lower by over 40%. From a stock price as high as $755 last seen in November 2021, the SVB share price closed at $106 yesterday while the market cap of SVB has collapsed from $44 billion to $6 billion.

So, what went wrong at SVB? Based in Santa Clara SVB’s troubles began when its parent company, SVB Financial Group, on March 8, announced the sale of $21 billion in securities from its portfolio and a $2.25 billion share sale to shore up finances. This was following a significant loss on its portfolio, which included US Treasury bonds and mortgage-backed securities. The investment was more in long-dated securities and in a rising rate scenario, their values tanked.

Immediately, the panic spread throughout the startup world as concerns about Silicon Valley Bank’s financial health grew. SVB lends a lot to tech startups after raising funds from start-ups. Several prominent venture capitalists and portfolio managers started advising their clients to pull their money out of the SVB.Meanwhile , SVB Financial Group Chief Executive Officer Greg Becker is asking depositors and customers to remain calm and continue supporting them.

SVB episode could be a classic case of a Bank Run – When many depositors simultaneously withdraw substantial sums of money from banks out of concern that the institution will go bankrupt, this is known as a bank run.

SVB could be one of the first casualties of the US Fed’s unprecedented rate hikes. Following a series of interest rate increases from the US Federal Reserve, certain banks, including Silicon Valley Bank, are finding themselves against the wall and were forced to raise their interest rates or risk losing them to competitors. Yet, banks with a large number of outstanding long-term, low-interest loans on their balance sheets, like SVB, are finding it challenging to give higher rates to depositors while maintaining lower rates of return on loans.

Only the run on Washington Mutual during the 2008 financial crisis, when that bank had around $300 billion in client deposits, would be bigger than Silicon Valley Bank’s failure if it happened. Silicon Valley Bank reported $212 billion in customer assets at the end of the previous year.

The worst-case scenario for any bank is that it runs out of cash or suffers enough losses to erode its capital, prompting regulators to sell the bank to a stronger competitor or close it down. Diluting equity is not what investors like in a company’s finances especially when there’s a crisis.

The silverlining for SVB is if there is no run on the bank and depositors stop withdrawing funds and also if the $21 billion garnered through sale is deployed in high-yielding short term Treasuries to shore up the balance sheet. The outcome has a larger impact on the stock market, which will be seen in the coming weeks, if not months.