SVB customers are predominantly technology-savvy entrepreneurs who have been able to raise large amounts of capital from investors in recent years. However, with this source of funding drying up, banking deposits are facing significant declines.
The bank was forced to clear a large portion of its private securities portfolio to meet demand for cash, as bond prices had fallen sharply as a result of the Federal Reserve raising interest rates last year. The bank expects a loss of around $1.8 billion. This is where the need for $2.25 billion in new capital came from.
The federal government is to blame for the crisis! The bank is facing huge problems, with American interest rates and federal policies tightening, but its own position was bad to begin with, before interest rates rose. As has been demonstrated by the repeated rounds of layoffs at major technology companies in recent months, this sector is now struggling more than ever.
The problem is that the company’s reserves of 21 million dollars worth of bonds are worth 1.79 times their face value, and have been for 3.6 years. This means that the company’s reserves are not enough to cover the costs of its storage for 3 years. This is a problem for the company.
With interest rates rising over the past year, the value of SVB bonds has decreased significantly compared to US Treasury bonds. The bank had two bad options: to get rid of its bonds at a much lower return than the current Treasury rate, or to sell them at a loss.
In essence, it was up to the bank to decide whether or not it believed the federal government would lower interest rates. It was clear that they did not believe rates would be lowered anytime soon. As a result, their expectations were out of line with reality, which hurt the value of the bank’s bonds and led them to make decisions that drove down the company’s stock price.
The other issue the bank is facing is the distress being experienced by the technology sector. This is because companies in the sector are particularly popular, as the bank’s name suggests. The fact that the technology market is struggling means that there are fewer deposits and thus the market’s distress is transferred to the bank. This also means that companies supported by venture capital have less money to deposit in banks.
Moody’s, a leading credit rating agency, has downgraded Tesla’s credit rating and issued a negative outlook for the company.
Although the bank is not the only one facing this situation, it may be the first to try to address the issue head-on. However, the market expects more pain in the banking sector.
The banking sector may face a sharp crisis following the sudden closure of the cryptocurrency exchange firm “Silk Road” and the attempted seizure of funds by the “Bank of Selkon Falls.” This has caused a sell-off in American bank stocks, raising concerns about the stability of the US banking sector.
Banks rely on depositors who are quick to invest their money, but with interest rates rising in tandem with declining bank stocks, they have faced severe losses, as these bonds cannot be sold quickly without incurring losses from the lower return on investment. If a large number of customers request their deposits at the same time, this could create a liquidity crisis.
There may not be immediate risks facing many banks, according to analysts, but the crisis could still be painful. Instead of facing a large wave of deposit inflows, banks will have to compete more fiercely to offer higher interest rates to savers in an attempt to make up for the gap with US Treasury yields. This could offset the gains banks make from lending operations and reduce profits.