What led to the failure of Silicon Valley Bank?
Friday's shutdown and takeover of SVB Financial Group Inc. (SIVB.O) by banking regulators might be attributed to the US Federal Reserve rising interest rates and reducing investor risk appetite.
But what happened that led to the failure of Silicon Valley Bank?
In an effort to combat inflation, the Federal Reserve has been increasing interest rates from record-low levels since last year. When available capital becomes more expensive due to higher interest rates, investors have a reduced risk appetite. This affected Silicon Valley Bank's major clientele, technology startups, by making their investors more risk-averse.
As increasing interest rates forced the market for initial public offerings for many businesses to close and made private fundraising more expensive, several Silicon Valley Bank clients began withdrawing funds to meet their liquidity requirements. This culminated in Silicon Valley Bank searching for solutions to meet customer withdrawals this week.
Wednesday, Silicon Valley Bank liquidated a $21 billion bond portfolio consisting primarily of US Treasuries to cover redemptions. The portfolio yielded an average of 1.79 percent, which was significantly lower than the current 10-year Treasury yield of roughly 3.90 percent. This resulted in a $1.8 billion loss for SVB, which it sought to cover through a capital increase.
To cover its funding gap, SVB stated on Thursday that it would sell $2.25 billion in common equity and preferred convertible stock. Investors feared that withdrawals of deposits could force the company to raise further capital, causing its shares to close the day down 60%.
Reuters claimed that several SVB investors withdrew their funds on the advise of venture capital firms such as Peter Thiel's Future Fund. This frightened investors such as General Atlantic that SVB had lined up for the stock sale, and the effort to raise funds failed on Thursday evening.
On Friday, SVB hustled to secure alternative funds, including a sale of the company. The Federal Deposit Insurance Corporation (FDIC) stated later in the day that SVB had been closed and placed in receivership. The FDIC said that it will seek to sell SVB's assets and that dividend payments to uninsured depositors could be paid in the future.
By fLEXI tEAM