Banking Sector In Crisis: Silicon Valley Bank Closed

Another bank is in crisis; Silicon Valley Bank (SVB) has followed the financial freefall amid Federal Reserve (Fed) Chairman Jerome Powell’s hawkish macroeconomic view and tightening policies to control inflation rates. 

With over 40 years in the market, Silicon Valley Bank is facing a significant downturn in its shares, falling more than 60% since Thursday. 

On Wednesday, the go-to bank for venture capitalists and tech startups launched a massive $1.75 billion securities sale to raise capital and try to recoup its earlier losses, raising concerns among investors. According to several reports, the financial institution was closed by Californian regulators. 

“This is one of the largest bank failures in history.”@sonalibasak explains the significance of Silicon Valley Bank being closed by California regulators https://t.co/GWK95eOmwl pic.twitter.com/iwyCzsyskq

— Bloomberg Crypto (@crypto) March 10, 2023 

What Is Happening With SVB?

Before today’s events, the Silicon Valley Financial Group was considering options for exiting the crisis, including a sale after the heavy lender sent shockwaves through global markets and battered its shares on the Nasdaq stock market. 

According to a Reuters report, Silicon Valley Bank needed the proceeds to plug a $1.8 billion hole caused by selling a $21 billion loss-making bond portfolio consisting primarily of U.S. Treasuries.

Investors in SVB’s stock were puzzled as to whether the capital raised by the bank would be sufficient to cover its losses. This perception arose from the continued decline in the fortunes of technology startups due to policies aimed at controlling inflation, which affects the technology sector that the bank serves. 

According to the report, Silicon Valley Bank told employees to go home until further notice, claiming that the bank is undergoing a series of “not yet concluded” conversations to determine the next steps after the crisis was revealed.

In addition, Silicon Valley Bank CEO Gregory Becker has been calling customers to assure them their capital is “safe” in the bank, which proved inaccurate due to the subsequent events. 

Silicon Valley Banking Crisis Hits All Financial Sectors  

According to Reuters, the decline in SVB’s shares has further affected major U.S. and European banks amid ongoing concerns about hidden risks in the sector and its “vulnerability” to the rising cost of money. 

Wells Fargo & Co has been hit by the ongoing crisis, falling 6%. In addition, JPMorgan Chase & Co shares have also been in free fall, down 5.4%, along with Bank of America and Citigroup Inc, falling 6% and 4%, respectively.

Karl Schamotta, Chief Market Strategist at Corpay, the global leader in business payments, addressed the ongoing issues with the SVB and the banking sector’s claims:

Investors are fearing a repeat of 2008-style sort of dynamics, and this sell-off in the banking sector has raised fears of systemic risk and it has raised the expectation that the Federal Reserve will step in to provide some accommodation if things worsen.

This ongoing crisis amidst inflationary policies has also taken the crypto industry by storm, affecting all major currencies and leading to lower levels. Bitcoin has currently fallen from $22,000 to around $19,000.

Global crypto market capitalization has also been affected, dropping from the $1 trillion psychology level to $900 billion, and is currently below that essential floor, dropping to $897 billion.

According to Karl, a crypto researcher at Thanefield Capital, the stable digital currency fully backed by US dollar assets and issued by CENTRE – a joint venture between Coinbase and Circle, USDC, 26% of its reserves are in the form of cash in banks, including SVB.

This crisis affects not only the banking sector but also the global crypto market capitalization and the price action of digital assets, which may visit lower levels and retest key supports, delaying the bull market that many analysts have predicted for the crypto industry.

SVB shares have plummeted from a high of $335 per share in early February and have been in free fall since the Nasdaq closed Wednesday at $225, currently trading at $106.

Feature image from Unsplash, chart from TradingView.com