Friday was all about the February jobs report and its impact on the Fed’s interest rate hike. SVB Financial Group (NASDAQ: SIVB) stole the show.
Financial regulators closed the country’s 16th-largest bank just two days after the company raised capital and sold assets below cost. His FDIC’s swift purchase of a bank with $209 billion in assets at the end of the year was the largest US bank failure since Washington Mutual was acquired in September 2008.
The collapse of Silicon Valley Bank has dealt a devastating blow to the venture capital (VC) groups that make up the bulk of the bank’s customer base. The VC was already taking a hit as rising interest rates and a slowdown in his IPO market made it harder to raise money.
It is also a dagger for shareholder Who saw SVB’s stock drop $500 from November 2021 onwards? The stock was halted on March 10, 2023 after he plunged 60% the day before. Wall Street research group Maxim later commented that SVB stock “likely has no value.”
Its ramifications are expected to extend beyond those closely associated with SVB.For starters, it can be more intense Regulatory scrutiny As government officials at local banks, big or small, sift through the wreckage, steps may follow to enact new laws to prevent similar collapses.
How did the SVB financial meltdown occur?
Shortly before the FDIC intervened, the SVB was forced to sell most of its available-for-sale securities at a loss to offset a decline in customer deposits. He announced a $2.25 billion capital raise to offset the situation, but it was too little and too late. How did we get to this point?
Silicon Valley Bank has been in business as a lender to some financial institutions for 40 years. of the technical department largest enterprise. But that doesn’t leave them vulnerable to economic pressure.
Customer deposits tripled from 2018 to 2021. It was a time when interest rates were low and tech startups had plenty of cash. However, as interest rates spiked in 2022, the VC market slowed down, as did deposit activity in SVB. Things got worse when banks invested the money they received in bonds, losing value as interest rates rose.
Ultimately, it was SVB’s decision to invest the majority of customer deposits. bond Mortgage-backed securities (MBS) quickly depreciated in value. Things reached a boiling point after the bank lost about $2 billion in securities sales and turned to the capital markets for help. The VC fund advised the company to withdraw his SVB deposit, setting the stage for a stock sale and regulatory intervention.
Will customer bank deposit behavior change?
SVB Financial had over $175 billion in deposits heading into the new year. Last week, a Silicon Valley customer wondered how much more he could recover beyond his $250,000 FDIC guarantee. They will have to wait until SVB knows when to sell the rest of its assets.
The event caused concern among depositors other bankFears of contagion are naturally rising as the SVB meltdown spreads to other banks. If these fears reach full-blown panic mode, some U.S. banks could be flooded with people queuing for branches and ATMs to get their hands on their hard-earned cash.
Another concern relates to new deposit activity. Newfound uncertainty in the banking sector could cause many Americans to pause future deposits and instead stuff money under their mattresses. This is a plausible scenario given that the is competing with the surge in US Treasury yields.
The current 6-month Treasury yield is around 5.08%. Bankrate’s latest survey shows average yields on savings accounts nationwide 0.23%The SVB story may just be a breaking point for individuals and businesses fed up with low deposit rates.
How did other bank stocks react to the SVB news?
The SVB heading is bank stocksInitially, fears of contagion caused widespread selling at local banks, especially those of similar size to the SVB. Citizens Financial Group, State Street and Fifth Third Bancorp fell for consecutive days last week. The SPDR S&P Regional Banking ETF (KRE) fell 16% in his week to a two-year low.
Then came the reality check.
Despite SVB’s shocking collapse, US banks are in much better shape than they were during the 2008-09 financial crisis.series regulatory rules In regular stress tests, déjà vu reserves and risk measures litter bank balance sheets.
That’s why several Wall Street analysts were quick to defend the sector. Wells Fargo saw the sell-off of mid-cap banks as an overreaction and echoed bullish sentiment in some stocks. Citigroup called the pullback an opportunity and added Comerica to its focus list.
large cap Banks with more diversified funding sources, lower credit risk, and better capitalization recovered faster. JPMorgan Chase, the country’s largest bank, showed a significant 2.5% trade volume rebound on Friday.
Even after the SVB collapse, bank stocks of all shapes and sizes could remain volatile. US banks are under the spotlight of regulators, while US investors are trying to determine whether the return potential is commensurate with the industry’s high risk profile.