Thursday proved to be a disastrous day for the banking industry, with the KBW Bank Index experiencing its largest single-day decline since June 2020, dropping by as much as 8.1%. Among the index’s worst performers was SVB Financial Group, the parent company of Silicon Valley Bank, which plummeted by 60%. Interestingly, it was not the case that Silicon Valley Bank was simply following the lead of industry giants JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corp., who also experienced losses; rather, it was the decline of Silicon Valley Bank that precipitated the broader market downturn. However, for many, the question remains: Who exactly is Silicon Valley Bank?
Based in Santa Clara, California, this bank is not a household name and lacks the scale to generate a national banking crisis, with assets totaling around $212 billion – less than a tenth of JPMorgan’s. Its focus is narrow, primarily providing financing to technology-related startups.
The crux of the issue lies in Silicon Valley Bank’s recent announcement, which took the market by surprise. Late on Wednesday, the bank’s parent company revealed that it had sold approximately $21 billion of securities from its portfolio, resulting in an after-tax loss of $1.8 billion for Q1. Additionally, SVB had sold $1.25 billion of common stock and $500 million of convertible preferred shares. Furthermore, General Atlantic had committed to buying $500 million of common stock, bringing the total raised to around $2.25 billion.
Needless to say, banks requiring emergency funds is never a good sign. However, the reason provided by SVB for the sudden capital raise caught many off guard: startups with deposits at the bank are withdrawing their cash. This development is not surprising considering the current climate. As the Federal Reserve implements aggressive interest rate increases, investors are becoming increasingly cautious about funding, particularly given concerns of an impending recession. According to venture capital firm Partech Partners, venture capital funding declined by 35% last year.
SVB is a significant player in the US venture capital-backed startup scene, with nearly half of all such startups doing business with the bank, as well as 44% of US venture-backed technology and health-care companies that went public last year, according to Bloomberg News. These sectors have suffered as a result of rate hikes, implemented to combat inflation, which have caused valuations to plummet and forced companies to search for cash. In a letter to shareholders on Wednesday, SVB CEO Greg Becker explained the bank’s actions, stating, “We are taking these actions 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.”
The importance of the technology and startup industries to the global economy cannot be overstated. Prior to the recent market turbulence, the value created by startups around the world was almost equal to the gross domestic product of a Group of 7 economy, and startup funding surpassed $600 billion globally in 2021, as per a World Economic Forum report from last year.
Between 2016 and late 2021, the NYSE FANG+ Index, which tracks the performance of major tech companies such as Apple Inc., Amazon.com Inc., Google parent Alphabet Inc., Meta Platforms Inc., and Netflix Inc., experienced a staggering 700% surge, compared to the S&P 500 Index’s 150% gain. However, since then, the NYSE FANG+ Index has dropped approximately 32%, and job cuts in the tech industry are piling up. In February, the tech sector saw announced workforce reductions of 20,442, surpassing the second-place retail sector’s 8,544, according to Challenger, Gray & Christmas.
Despite benchmark interest rates rising from near zero in March 2020 to 4.75% currently, the economy has managed to avoid the recession that many had predicted. However, Silicon Valley Bank’s current struggles may be the first indication that a recession has arrived, causing concern throughout the industry.