Silicon Valley Bank crisis: Everything you need to know about SVB Financial as its share collapse rattles major stocks
Dado Ruvic/Reuters
- SVB Financial's share plunge is dragging on major bank stocks like JPMorgan and Bank of America.
- SVB shares collapsed 60% Thursday and another 45% ahead of Friday's opening bell.
- Here's everything you need to know about the California bank – and why it's spooking investors.
A little known California bank has become the biggest story in markets right now as its stock-price crash drags on the biggest names in US banking, including JPMorgan and Bank of America.
Here's everything you need to know about Silicon Valley Bank and its parent company SVB Financial.
What just happened?
SVB Financial Group's shares crashed 60% Thursday and were down another 45% in premarket trading Friday after the company said it would sell $2.3 billion worth of stock to cover massive losses on the lender's bond portfolio.
SVB is a Santa Clara-based bank that lends money to and takes deposits from Silicon Valley tech startups.
It provided funding to 44% of all venture capital-backed tech and healthcare companies that publicly listed on a stock exchange last year, according to its website.
Why has SVB's stock price crashed?
There are two reasons – but they're both tied to the Federal Reserve's aggressive interest-rate hikes as it bids to crush soaring inflation in the US.
When interest rates rise, startups find it more difficult to access funding with borrowings turning costlier – and that's fueled a high level of deposit outflows from SVB, analysts say. This sparked fears of a bank run, prompting several of the SVB's clients to limit their exposure to the institution.
SVB's "unique niche in the tech world is a real boon when that business is booming, but a problem when it's not," Interactive Brokers chief strategist Steve Sosnick said.
The Fed's tightening campaign has also weighed on SVB's bond holdings, and it disclosed a $1.8 billion loss Thursday after completing a $21 billion fire sale of its fixed-income portfolio.
The company said it would raise $2.3 billion through stock sales to cover those losses – but a flood of SVB shares onto the market would dilute the value of what shareholders already hold, sparking Thursday's massive sell-off.
How is it affecting other bank stocks?
Crypto-friendly bank Silvergate Capital announced Thursday it would shut down – coincident crisis at two financial institutions ignited fears of contagion effects across the entire sector, fueling a sharp selloff across banking stocks.
Wall Street's four biggest banks – JPMorgan, Bank of America, Wells Fargo, and Morgan Stanley – shed $55 billion in combined market value Thursday with investors rattled by the implosion of SVB and Silvergate, according to data from Refinitiv.
The KBW Bank Index – which tracks the price of the US's leading publicly-traded banks – plunged 7.7% on its worst day in almost three years.
Are investors worried?
Yes. Some of Wall Street's biggest names have raised the alarm as fears grow that SVB's turmoil will spread to the wider financial system.
"It is possible today we found our Enron," 'Big Short' investor Michael Burry said Thursday in a now-deleted Tweet, referencing the scandal-hit energy firm whose collapse came to symbolize the early-2000s stock-market crash.
Top economist Mohamed El-Erian and "Wolf of All Streets" trader Scott Melker are also fretting about the wider impact of SVB.
What happens next?
US markets open at 9.30AM ET Friday – and that will provide investors with more information about how the market views SVB and the blue-chip bank stocks that have become caught up in its turmoil.
SVB executives will be hoping that the stock sale helps it to raise some much-needed cash so that it can carry on functioning despite the losses it suffered on its bond portfolio.
Billionaire investor Bill Ackman has called for the US government to bail out the company because of its important role in the world of venture capital.
"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," he said on Twitter Thursday evening.
"If private capital can't provide a solution, a highly dilutive government preferred bailout should be considered," Ackman added.