On Thursday, a lender with main focus in Silicon Valley caused widespread alarm in the whole world, which in turn weighed down banking shares worldwide. What is Silicon Valley Bank (SVB) and what is actually happening?
What is Silicon Valley Bank?
SVB Financial Group is a parent company of Silicon Valley Bank, which is one of the largest commercial banks in the world. It is also the biggest bank in terms of local deposits in Silicon Valley. In fact, it has a market share of more than 25% in Silicon Valley.
It was founded in 1982 and it’s known as the bank for startups as it funded tens of thousands of startups over the course of a few decades. The company ran into trouble just one day after Silvergate, a well-known crypto bank, officially shut down its business.
Its website states that it works with 44% of VC-backed tech and healthcare IPOs in the US last year, and with nearly half of all VC-backed startups in the US. Failure of such a bank could have drastic effects on financial markets.
What’s happening to SVB?
With a cool-off in the startup world, SVB got into problems. So, to strengthen its financial position, SVB’s parent firm, SVB Financial Group, stated that it was selling $21 billion in securities from its portfolio and holding a $2.25 billion share sale.
Analysts speculate that the decision was triggered by a significant decline in the bank’s deposit base as a result of the broader downturn in the startup industry. Net interest income is expected to fall even further. Those high interest rates are really hurting companies worldwide.
In response, sources say renowned VCs including Peter Thiel’s Founders Fund, Coatue Management, and Union Square Ventures told their portfolio companies to reduce their risk and withdraw funds from the bank.
Several VC firms have requested that their portfolio businesses move at least some of their cash out of SVB, while others have stated they will continue to support the bank. With all the panic spreading, people are comparing this to the Lehman Brothers crisis from 2007 to 2008. The FUD (fear, uncertainty, doubt) is very visible on the company’s stock.
SVB plunged over 60%
First Silvergate, now SVB. The stock has been falling ever since it found its peak at $755 in November 2021. While SVB was already down 85% from its all-time high (ATH) level, it plunged an additional 60%, being almost 95% lower from ATH.
SVB stock chart, source: google.com
SVB is not alone. The whole banking sector suffers, with Deutsche Bank tumbling 7% and Signature Bank falling 7.7%. However, SVB CEO, Greg Becker, urged everyone to “remain calm” and prevent a run on the bank.
Is the Silicon Valley party over?
The rise of startups was tremendous in the last few decades. With a bank like SVB going down, the whole industry could suffer significantly. According to CNBC, Silicon Valley Bank’s parent company, SVB Financial Group, is negotiating a sale of the company.
To be more specific, the article stated the financial institution is trying to sell itself after unsuccessfully seeking further funding. If SVB fails to save itself, we could witness another strong selloff on all markets in the upcoming months despite the fact that 2022 saw a downtrend.