Nearly 86 percent of the bank’s customer deposits were believed to be uninsured
It took only 48 hours for Silicon Valley Bank to become the nation’s second-largest bank failure.
The company’s problems started on Wednesday when the financial institution informed investors that it needed to generate $2.25 billion to cover an unexpected decline in deposits and improve its balance sheet and overall financial position.
In a letter to shareholders, the bank’s parent company, SVB Financial Group, reported that the rising-rate environment and slowing economy applied pressure to public and private markets. It further explained that clients endured enormous cash burn levels (net decrease in cash over time).
This revelation erased approximately $10 billion in market capitalization in a single trading session, as the stock tanked 65 percent to $106. In after-hours trading on Friday, shares plunged another 60 percent. SVB Financial bonds also cratered to 31 cents on the dollar.
Founded in 1983, the bank is a top Silicon Valley lender based in Santa Clara, California. The sudden failure of SVB has created uncertainty among tech investors and startups who had large exposure to the bank.
The primary reason for the bank’s demise, according to industry analysts, was that it heavily invested customer deposits in treasury bonds, which are highly sensitive to interest rates.
“There is no question that SVB is in a cash crisis because of its over exposure to the tech sector,” said Chenxi Wang, the founder and general partner of Rain Capital, in a note. “The bank also made balance sheet management errors by putting too much money into long-term bonds, which became a problem when interest rates surged. This, coming on the heels of the Silvergate Bank liquidation, caused non-trivial panic.”
The lack of capital and the clarion call across Silicon Valley and social media initiated a bank run, as clients withdrew an enormous $42 billion of deposits on Thursday. By the close of business, SVB maintained a negative cash balance of $958 million, according to a filing from the Department of Financial Protection and Innovation of the State of California.
By Andrew Moran
