The banking sector experienced a massive sell-off on Thursday after the Silicon Valley Bank (NASDAQ:SIVB) stock plummeted 60%, following the share sale announcement and Silvergate Bank’s (NYSE:SI) decision to close down operations.
The S&P 500 bank index saw its steepest one-day drop in more than two years on the day, sliding over 6.5%.
After its stock collapse wiped out over $80 billion in value from bank shares, SVB continued to decline on Friday by an additional 41%. The unprecedented drop took SIVB to double digits, with the stock opening below $60 per share on Friday. A year ago, the stock was trading near $600 per share.
CNBC reported on Friday that the bank is now in talks to sell itself after failing to raise funds. Accordingly, big financial players are looking at a potential purchase of SVB.
Why Is SVB Collapsing?
The collapse came after the bank announced plans on Wednesday to launch a $1.75 billion share sale to shore up its balance sheet and plug a $1.8 billion hole caused by the bank’s $21 billion loss-making bond portfolio, consisting mainly of U.S. Treasuries.
The portfolio was yielding the bank an average 1.79% return, compared to a 10-year Treasury yield of around 3.9%.
The bank’s investors were anxious about whether the share sale would help the bank secure enough funding amid the ongoing venture capital (VC) financing drought and struggles of tech startups the SVB serves.
The bond market has been under pressure as the Federal Reserve continued to deliver jumbo interest rate hikes last year. SVB said it is reinvesting the proceeds from bond sales into short-term assets, and said that high-interest rates and “elevated cash burn from our clients” were reasons behind the new capital raise plan.
According to Mike Mayo, an analyst at Wells Fargo (NYSE:WFC), SVB’s issues came as a result of poor funding diversification as elevated interest rates, recession risks, and a slowdown in initial public offering (IPO) deals have made it more difficult for startups to raise fresh capital.
In a separate deal, the bank said private equity (PE) firm General Atlantic will purchase $500 million worth of SIVB stock.
In the meantime, rating agency Moody’s trimmed SVB’s long-term local currency bank deposit. Payden & Rygel’s Natalie Trevithick said SVB’s bonds were not doing as badly as the equity.
“Future performance is going to be news dependent but I don’t expect them to properly recover in the near term. It’s not quite cheap enough for a lot of buy-the-dip people to come back in,” Trevithick said.
Following the fallout, SVB CEO Gregory Becker started calling clients to reassure them their money with the bank remains safe, according to Reuters. But some startups have been urging their founders to withdraw their money from SVB to prevent further losses in case things continue to deteriorate. One of these startups is Founders Fund, a VC firm founded by Peter Thiel.
“The Silicon Valley raise got everybody nervous about people’s capital levels and what deposits are doing. A lot of institutional investors don’t feel great about owning certain banks right now,” said R.J. Grant, head of trading at Keefe, Bruyette & Woods in New York.
One startup already pulled all of its funds out of SVB on Thursday, the Reuters report said, which it later transferred to another bank account. SVB is one of the key banking partners for early-stage businesses, serving almost half of the VC-backed tech and healthcare startups in the U.S.
“While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Becker said in a letter to investors.
Silvergate to Wind Down Operations
The SVB stock crash came just a day after Silvergate Capital (NYSE:SI) said it will close down operations and voluntarily liquidate Silvergate Bank which suffered billions in withdrawals in recent months amid the persisting crypto winter. SVB said it has minimal exposure to crypto.
The bank said its liquidation plan involves full repayment of all deposits, saying it is also working to resolve claims and “preserve the residual value of its assets, including its proprietary technology and tax assets,” it said in the filing.
Silvergate woes began after the crypto exchange FTX collapsed in November 2022, after which the crypto-friendly bank saw a loss of nearly a billion dollars, while its total deposits from digital asset customers plunged to $3.8 billion from $11.9 billion in Q4.
Things worsened last week when Silvergate said it would delay its 10-K annual report due to business and regulatory hurdles. The announcement erased over 50% of Silvergate’s stock value last Thursday, with the stock falling below the $3 mark during Wednesday’s after-hours trading.
The delay announcement also urged high-profile crypto firms like Coinbase (NASDAQ:COIN), Paxos, and Galaxy Digital to cut their ties with Silvergate, which further accelerated customer withdrawals. On Friday afternoon, Silvergate Capital Corporation suspended the Silvergate Exchange Network (SEN), which in addition to SVB, was one of the banking platforms that provided crypto firms U.S. banking access outside regular working hours.
The bank stocks took a heavy beating on Thursday with the SVB and San Francisco-based First Republic leading the losses. Wall Street giants were also down, including JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) on fears the SVB drama could spill over to the rest of the banking sector.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.