Silvergate and Silicon Valley Bank's Stocks Collapse. A New Financial Crisis?
Is this an isolated incident, or could it be a sign of a larger systemic problem in the US banking system?
Silicon Valley Bank (SVB) suffered a liquidity crisis that led to a fire sale of its bond portfolio, causing a huge loss of almost $2 billion. This event triggered a potential bank run, with the bank's stock price falling 60% during the trading day and down another 20% after hours.
This incident comes after another bank's collapse, causing panic in the financial markets, with all bank stocks being sold off. In this article, we'll examine what caused SVB's price to collapse and whether it's part of a bigger systemic contagion problem that could create another global or U.S. financial crisis that could crash the stock market.
SVB is not a traditional bank but provides banking services to start-up companies that are backed by venture capital and deemed too risky for traditional lenders.
The bank serves half of the U.S. venture-backed technology and life sciences companies. The bank faced a deposit problem, as it needs to have deposited to function, and its source of funding is customers depositing money. In traditional banks, the people depositing money are diversified across individuals and companies from different industries, but SVB's customers depositing funds are startup companies themselves.
In the last two years, there's been a constant stream of free cash due to high liquidity. Silicon Valley Bank had more deposits than it needed to lend out, so it bought long-term treasury bonds of 30-year maturity, which is now causing a Mark to Market loss on the bonds. As interest rates rise, the bond prices collapse, and they have to sell treasury bonds at a huge loss. SVB is now suffering from declining deposits due to cash burn, making it hard to become profitable and go public. As a result, many start-up companies withdrew cash from SVB, causing a liquidity crisis.
The bank had a huge amount of money from past depositors that it used to buy long-term bonds. However, these bonds have a 30-year maturity period, and the bank needs the money now, so they have to sell the bonds at a loss. They have about $91 billion worth of these bonds, which they now have to sell.
The collapse of SVB's stock price triggered a potential bank run in the company, leading to panic in the financial markets. All bank stocks got sold off violently, with JP Morgan and Bank of America going down by 5% and 6%, respectively. The Regional Bank ETF KRE was down 8%.
In conclusion, SVB's collapse is not a credit problem but a deposit problem caused by a liquidity crisis. Although the incident is an isolated one, it could be part of a bigger systemic contagion problem that could create another global or U.S. financial crisis. Therefore, financial institutions must be vigilant and implement measures to prevent similar incidents from occurring in the future.