SVB’s Disaster
SVB Financial Group, the parent company of Silicon Valley Bank, has been hit hard by the sudden rise in market interest rates, leading to tens of billions of dollars in unrealized losses on its securities portfolio. During the pandemic, the bank purchased seemingly safe assets, primarily longer-term U.S. Treasuries, and government-backed mortgage securities, which are at virtually no risk of defaulting but pay fixed interest rates for many years. However, the recent market interest rate shift has resulted in the securities worth less on the open market than their value on the bank’s books.
Compounding the issue, the bank’s deposit inflows turned to outflows as clients burned cash, and ceased getting new funds from public offerings or fundraisings. In response, on Wednesday, the bank announced it had sold a significant portion of its securities, worth $21 billion, at a loss of approximately $1.8 billion after tax. Unfortunately, this led to a catastrophic drop in the bank’s stock price, making it more challenging to raise capital and ultimately forcing the bank to abandon its share-sale plans. However, the bank’s woes did not end there. On Thursday, a massive $42 billion customer withdrawal ensued, accounting for approximately 25% of the bank’s total deposits. Many bank deposits are sizeable enough not to carry Federal Deposit Insurance Corp. protection. The FDIC has assured customers that they will have full access to their insured deposits no later than Monday morning, but the current number of uninsured deposits is yet to be determined.
Overall, the sudden market interest rate shift has exposed SVB Financial Group’s overreliance on seemingly safe, long-term fixed-interest securities and has had significant repercussions for the bank and its customers. What do you think about the situation with SVB? And how will it affect tech companies going forward?
Want to learn how to invest? Download the Invstr app, where you can play Fantasy Finance and manage a virtual investment portfolio or open a brokerage account and invest for real. Take our interactive investing course on Invstr Academy and become a better investor today!
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
