The next few days promise to be decisive for market confidence in the global financial system.
Deep concern gripped most financial centers on March 10 due to the failure of Silicon Valley Bank, the prominent technology lender.
That worry comes as investors are already concerned about the outlook for the global economy due to an uncertain monetary policy at the Federal Reserve.
The Federal Deposit Insurance Corp., a guarantor for bank depositors, took control of the assets of SVB Financial Group (SIVB), a prominent bank that finances many startups.
"Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver," the federal agency said in a news release.
"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds."
The move makes the bank the second-biggest failure in the industry after Washington Mutual in 2008.
The collapse came after the bank rocked venture capital firms and investors by suddenly saying that to strengthen its capital position, it needed to raise $2.25 billion of additional capital by issuing new common and convertible preferred shares.
SVB Hurt by Interest Rate Increases
The Santa Clara, Calif., bank said it "commenced an underwritten public offering, seeking to raise approximately $2.25 billion between common equity and mandatory convertible preferred shares."
"We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses," the firm added.
The reason SVB had to resort to a capital raise is that many startups that have deposits at the bank withdrew those funds, as they were burning a lot of cash.
The bank had to sell bonds, primarily U.S. Treasury securities, at a discount to cover these withdrawals. The rise in interest rates has made existing bonds less valuable. In selling these bond positions, SVB had to take a significant loss.
This raises all sorts of alarms because investors perceive this move as a desperate measure.
Banks can be especially vulnerable to rising rates, which can cause the value of their investment assets, especially bonds, to fall. This can hurt the ability to raise capital.
The economic slowdown is having a major impact on tech companies, whose products and services are suffering from cautious consumers and businesses that are worried about the health of the economy and reducing spending. Many tech companies thus have seen reduced demand, but at the same time they need money to operate.
The tech sector has recently embarked on drastic cost reductions to navigate these difficult times. About 127,354 tech jobs have been shed this year, according to data firm Layoffs.fyi.
In addition to the SVB shares, which fell more than 60% after the announcement, the shares of most banks worldwide were hit, with investors wondering about the risk of contagion of SVB's difficulties to the financial system.
VC Firms Want Their Money
The Euro Stoxx Banks index was on course for its worst stock market day since June: Deutsche Bank finished trading down 7%, while Societe Generale gave up 4.1%, HSBC dropped 4.2%, ING lost 4.5% and Commerzbank fell 3%.
In the U.S., the KBW Bank index on March 9 had its worst day since June 2020. Regional banks were the most affected: At last check First Republic (FRC) fell almost 22%, while Signature Bank (SBNY) was down 24%.
SVB stock was suspended on March 10 on Wall Street.
Investors fear that other banks could face troubles as well.
"The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered," hedge fund titan Bill Ackman said on Twitter.
He added: "The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall. That is why gov’t intervention should be considered."
Founders Fund, billionaire Peter Thiel's firm, had asked companies it has invested in to withdraw their funds from SVB, according to Bloomberg News. Coatue Management, Union Square Ventures and Founder Collective, other prominent venture capital firms, have asked their companies to do the same.
Founders Fund and Coatue declined to comment. Union Square Ventures didn't immediately respond to a request for comment
SVB Financial Group CEO Greg Becker held a conference call on the evening of March 9 during which he called on customers to remain calm. He had asked venture capital investors to support the bank in this difficult moment, as the bank has supported them for the past 40 years.
The plea arrived too late.
