SVB Financial Group, which does business as Silicon Valley Bank, suffered steep losses on Thursday and Friday after revealing plans to raise over $2 billion from investors to counter losses from the sale of its bond portfolio. The lender’s shares slumped 60% on Thursday, its largest loss ever, after the announcement, and dropped another 40% in pre-market trading on Friday. The article explores the reasons behind the steep losses and the impact on other banks in the US and Europe.
Reasons behind the steep losses
SVB’s plan to raise funds failed to reassure investors concerned about the strength of its balance sheet. The startup-focused bank’s deposits were dropping faster than expected, largely due to increased spending by its clients, mostly technology and healthcare startups. Additionally, venture capital investments, a crucial source of funding for the bank’s clients, were expected to be constrained in the near term as the US Federal Reserve hikes rates, offering little hope of a quick turnaround.
Federal Reserve Chair Jerome Powell’s testimony this week also added to the bank’s woes. Powell said the central bank would likely need to raise interest rates more than expected in response to recent strong data. This, coupled with fears about unrealized losses in banks’ bond portfolios, contributed to the sharp falls in US banks’ share prices on Thursday.
Impact on other banks in the US and Europe
The rout at SVB spilled over into other banks in the US and Europe. The S&P 500 bank index dropped 6.6% on Thursday, while a selloff in major European lenders on Friday weighed on the region’s main indexes. Credit Suisse analysts wrote in a note that fears about unrealized losses in banks’ bond portfolios, catalyzed by sharp falls in US banks’ share prices on Thursday, presents a buying opportunity for European banks.
Conclusion
SVB’s steep losses serve as a reminder of the challenges facing banks in an uncertain economic environment. The startup-focused bank’s struggles highlight the difficulties of catering to a specific sector and the risks involved in relying too heavily on venture capital investments. As the US Federal Reserve continues to hike rates, more banks may face similar challenges. Nonetheless, the Credit Suisse analysts’ note suggests that there may be opportunities for European banks to take advantage of the current situation.
