Silicon Valley Bank crisis: What led to stock crash & what’s next. Here’s everything you need to know

The Silicon Valley Bank (SVB), one of the leading lenders in the United States has sparked a wave of panic in the country after it brought down banking shares across the world. This comes as the SVB announced a share sale to shore up its finances following a significant loss of 60 per cent in its portfolio. Amid concerns over the bank’s financial position in the market, a person familiar with the matter said Greg Becker, the SVB Financial Group Chief Executive Officer held a conference call around 11:30 am (Fransico time) with the bank’s advising clients including its venture and capital investors for 10 minutes and urged them to ‘stay calm’ and to support the bank like they had been doing for the past 40 years. Now to understand what happened with one of the US’s oldest lenders, it’s important to look at why did it happen and what’s next. Here’s everything you need to know:

When and how did the crisis begin?

As per Google Finance, SVB’s stock fell 60 per cent ($106.04) on Thursday and its bond posted record declines.

Back in 2021, the bank saw a massive influx in its deposits which jumped from $61.67 billion to almost $189.20 billion. As its deposits grew, it failed to generate its loan book fast enough to generate the yield it wanted to see on the deposited capital. To tackle this, the bank purchased a large mortgage-backed security (MBS) worth $80 billion for its hold-to-maturity (HTM) portfolio. Over 95 per cent of these MBS were for over 10 years, with an average yield of 1.56 per cent. 

However, with the rise in Fed rates, the value of SVB’s MBS decreased, as the customers could buy “risk free” bonds from the Fed at a 2.5x higher yield, meaning, with the rising value of the Fed, the value of existing bonds fell. 

Who are the SVB’s clients?

The United States’ leading lender is deeply connected to startups, as its focuses on trade in Silicon Valley and tech startups only. 

As per the bank’s website, it does business with over 50 per cent of all US venture capital-backed startups and almost 45 per cent of US venture-backed tech and healthcare companies.

The SVB announced that it had sold $21 billion of its Available For Sale (AFS) securities at a $1.8 billion loss and was raising another $2.5 billion in equity and debt. 

This came as a surprise for its investors, who thought that the bank won’t sell it AFS. Prominent venture capitalists advised businesses and startups to withdraw their money from the bank. 

According to Bloomberg, a high-profile VC firm, Founders Fund, asked its portfolio companies to move their money. Union Square Ventures and Founder Collective also advised their portfolio companies to pull their funds from the bank. 

 What could happen next?

With the ongoing crisis at the SVB, analysts have raised their respective concerns.

According to a founding engineer at glean, Debarghya Das if tech companies and startups continue to pull their money out of the bank, the SVB might go bankrupt, and tech companies would be wiped out and raising the chances of recession.