Why Silicon Valley Bank Crisis Is Rattling America's Biggest Banks

Why Silicon Valley Bank's crisis is rattling America's biggest banks

Dan Fitzpatrick

The problems of two small banks on the West Coast are rippling across markets and causing new investor concerns about some of the country’s largest financial institutions.

Why? Three words: rising interest rates.

The Federal Reserve’s aggressive campaign to bring down inflation helped set the stage for major problems at two California lending institutions — SVB Financial (SIVB) and Silvergate Capital (SI) — as an outflow of deposits forced both to sell assets at a loss. Those assets were bonds.

Banks are big investors in assets like Treasury bills because they need lots of safe places to park their cash. Many financial institutions piled into these investments during a period of historically-low interest rates that spanned the early years of the pandemic, as banks took in tons of new deposits and lending was somewhat restrained.

But now the Fed is hiking rates at a rapid clip, with Fed Chair Jay Powell warning earlier this week the central bank may have to speed up the pace of its rate increases to cool the economy further. The problem that creates for banks is simple: higher rates lower the value of their existing bonds.

The withdrawals at SVB's Silicon Valley Bank have come from startups and technology firms, many of which also ran into new trouble once the Fed began raising rates.

The deposit outflow forced SVB to sell assets and take a $1.8 billion loss, a move the bank made “because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.” Its shares fell more than 60% Thursday.

In pre-market trading on Friday, SVB shares were down another 60% after overnight reporting from Bloomberg said VC firms ranging from Peter Thiel's Founders Fund to Union Square Ventures had told portfolio companies to pull their money from Silicon Valley Bank.

Banks don't have to realize losses on bonds that may have gone down in value amid rising rates if they're not pushed to sell these assets. But Silvergate Capital and SVB Financial didn’t have that choice. Customer withdrawals at Silvergate Bank and SVB’s Silicon Valley Bank forced their hand.

At Silvergate, which caters to cryptocurrency clients, customers yanked their money in the panic that followed the 2022 collapse of cryptocurrency exchange FTX. Silvergate said in January that it had realized losses of $886 million from selling securities as deposits fell. That weakened the bank considerably. On Wednesday it said it would wind down its bank, and its shares plunged Thursday.

After disclosing the $1.8 billion loss and new capital raise, Silicon Valley’s CEO Greg Becker urged calm in a call with venture capitalists Thursday, according to The Information, asking these investors not to withdraw money. It now is seeking to raise $2.25 billion of new capital to cover the new losses.

The concern now among investors is that much bigger banks could be forced to do the same. That sent the stocks of giant financial institutions tumbling Thursday, including the biggest of the big: JPMorgan Chase (JPM) and Bank of America (BAC). A major bank index fell by the most Thursday in nearly three years.

The biggest U.S. banks are much stronger than they were in the lead up to the last big banking crisis, in 2008, in part because regulators forced them to hold more capital and survive numerous stress test scenarios over the last decade and a half. And the giants have more diverse funding and customer bases than banks such as Silicon Valley or Silvergate, which gives them many more options during challenging times.

Bank stocks, he said, "have gotten Powelled," referring to the Fed chair.

"Going from zero to 5% interest rates in a period that is faster than any time in four decades, you are going to have casualties."

Silicon Valley Bank drops another 60% and is halted, as pressure mounts on banking sector

Hugh Son Jesse Pound John Melloy

• Shares of Silicon Valley Bank, tumbled for a second day Friday and weighed on the entire banking sector again on concern that more banks would incur heavy losses on their bond portfolios.
• Concern among founders and venture capital investors spiked earlier this week after Silicon Valley Bank surprised the market by announcing late Wednesday it needed to raise $2.25 billion in stock.
• The shares were down another 62% in premarket trading Friday before they were halted as CNBC’s David Faber reported the bank was attempting to sell itself. The shares did not open for regular trading.

Shares of SVB Financial Group, known as Silicon Valley Bank, tumbled for a second day Friday and weighed on the entire banking sector again on concern that more banks would incur heavy losses on their bond portfolios.

SVB’s CEO Greg Becker held a call with clients Thursday afternoon to calm their fears, CNBC learned, after a 60% tumble in the stock that day. The shares were down another 62% in premarket trading Friday before they were halted for pending news. They did not open for trading with the market at 9:30 a.m.

Concern among founders and venture capital investors spiked earlier this week after Silicon Valley Bank surprised the market by announcing late Wednesday it needed to raise $2.25 billion in stock. The bank had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss as its startup clients withdrew deposits, it said.

SVB customers said they didn’t gain confidence after Becker urged them to “stay calm” in a call Thursday afternoon, and the stock’s collapse continued unabated, reaching 60% by end of trading.

The mounting pressures on SVB prompted hedge fund billionaire Bill Ackman to speculate that if private investors can’t help shore up confidence in the California lender, a government bailout could be next.

Treasury Secretary Janet Yellen said during testimony Friday on Capitol Hill said there are a few banks she is monitoring very carefully related to the issues at SVB.

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