United States: a Silicon Valley bank sows a wind of panic on Wall Street

United States a Silicon Valley bank sows a wind of

Increase its liquidity to strengthen its balance sheet, weakened by customer withdrawals. This is the objective of the Silicon Valley Bank (SVB), privileged partner of the technological sector. The parent company of this Californian establishment, SVB Financial Group, announced on Wednesday March 8 a major capital increase of 2.25 billion dollars.

The group also hastily sold a $21 billion portfolio of financial securities, resulting in an estimated loss of $1.8 billion. As reminded The worldit still has a $91 billion portfolio of bonds left that it has planned to hold until maturity and whose current market value is only $76 billion.

The entire financial sector has been shaken by the difficulties of SVB Financial. The four largest American banks thus lost 52 billion dollars on the stock market on Thursday 9 March. SVB Financial plunged 60% on Wall Street while JPMorgan Chase lost 5.4%, Bank of America 6.20%, Citigroup 4.10% and Wells Fargo 6.18%. Faced with this onset of panic, the financial director of the SVB, Greg Becker, urged his customers to “stay calm”.

“People have realized that the problems SVB is experiencing could happen to the whole banking industry,” said Steve Sosnick of online broker Interactive Brokers. Banks generally borrow short-term to make medium- and long-term loans. “It’s not a good model when you’re in a situation of an inversion of the yield curve”, underlined Steve Sosnick.

A situation that “does not reflect that of the rest of the sector”

For Alexander Yokum, who follows the establishment for the firm CFRA, the problem is that SVB mainly deals with the venture capital and private equity sectors. But the latter, with the rise in interest rates, “are going through a difficult time” and need to withdraw money. To cope with these withdrawals, SVB needs cash quickly.

Ratings agency S&P Global Ratings has downgraded the rating it gives to the company’s debt by one notch, saying SVB was likely to face even more withdrawals.

For Mike Mayo, a specialist in the banking sector at Wells Fargo, the problem of SVB is linked to “the lack of diversification of funding” with most deposits coming from venture capital. Its situation “does not reflect that of the rest of the sector”, he believes. But it “affects the mindset” of investors.

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It’s a coincidence but SVB raised its issues the night Silvergate Bank, a well-known cryptocurrency institution, announced its liquidation in light of the recent turmoil in the digital currency industry, notes Alexander Yokum. “So everyone is suddenly wondering about the situation of other banks and wondering what their portfolio of financial securities looks like” because with the rise in interest rates, the value of bonds goes down, he explains. .

The American agency responsible for guaranteeing bank deposits (FDIC) recently estimated that if regulated banks were to suddenly sell all their portfolios of financial securities, it would generate 600 billion dollars in losses.

Typically, banks simply wait for bonds to mature, not losing money in the process. But the hypothesis that banks are suddenly forced to sell securities to bail out and take significant losses, “worried”, advances Alexander Yokum.

“That’s probably not going to happen,” he says. But it also reminds investors that some customers of traditional banks are beginning to withdraw the money available in their current account for financial products offering, with higher rates, higher returns, he adds.