SVB Financial Group subsidiary Silicon Valley Bank was the 16th-largest bank in the U.S. and was often referred to as the “financial partner of the innovation economy.”
But in an unexpected turn of events, shares of SVB Financial fell nearly 60% after the bank announced its plans to raise more than $2 billion to strengthen its balance sheet. This triggered a startling bank run among venture capitalists and other account holders, resulting in the tech-savvy bank’s collapse.
Despite this, startup investing platforms like StartEngine and Wefunder might be one of the unexpected winners from the banks downfall.
SVB’s collapse is the second-largest bank failure in U.S. history after the 2008 Lehman Brothers Inc. collapse that triggered the Great Recession and a massive sell-off in the stock market.
Last week, the Dow Jones Industrial Average witnessed its worst week since June, while the S&P 500 reported its biggest one-day decline last Thursday.
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Silicon Valley Bank’s Sudden Collapse: What Happened?
California-based Silicon Valley Bank had a significant volume of government bonds, including Treasury Bills. According to Bloomberg News, the Silicon Valley Bank’s bond holdings accounted for more than 50% of its assets. Consequently, the rising interest rate backdrop had been unfavorable for the bank, as bond prices move inversely with interest rates.
As its total asset value fell, SVB sold approximately $21 billion worth of bonds, incurring a total loss of $1.8 billion on the sale. To recoup its losses and offset the higher cash burn, the bank announced plans to sell shares worth $1.75 billion, triggering panic among investors and clients.
Few venture capitalists and Wall Street analysts predicted the Silicon Valley Bank collapse. According to FactSet, shares of SVB Financial had an average price target of $261.85, based on the predictions of 22 analysts.
"The Silicon Valley raise got everybody nervous about people's capital levels and what deposits are doing. A lot of institutional investors don't feel great about owning certain banks right now," said R.J. Grant, head of trading at Keefe, Bruyette & Woods in New York.
"It just gets people freaked out because Silicon Valley historically has been a very strong, well-run bank. If they're having issues right now, people are wondering what about other banks that are lesser quality and that don't have the reputation that Silicon Valley Bank has."
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Growth Prospects for Equity Crowdfunding
While the second-largest banking failure in the U.S. will slow demand for risky investments for the time being, the instantaneous response of federal regulators is expected to limit the downside. One major difference between the Silicon Valley Bank collapse and the 2008 financial crisis is the government’s accommodative actions to prevent a shakedown of the banking sector.
Because SVB catered to tech-focused startups and venture capital firms, tech-oriented startup investing will likely take a hit in the aftermath. As the credit market shrinks, startups quickly turned to other fundraising techniques, including equity crowdfunding through StartEngine and Wefunder.
In a statement earlier today, StartEngine CEO Howard Marks said “I’ve spoken to many founders of otherwise strong businesses, and I’ve heard first hand the uncertainty they now face. That’s why when the news broke, I asked my team to fast-track onboarding for impacted founders - so they can raise capital as soon as possible.”
Despite an otherwise bad situation for the industry, this could mean a golden opportunity for equity crowdfunding portals.
Emergency Response, Buyouts And President’s Statement
After shares of the Silicon Valley Bank fell by nearly 68% in pre-market trading on March 9, Nasdaq Stock Exchange regulators halted the trade of SVB shares on U.S. exchanges. Amid solvency concerns in the aftermath of SVB Financial’s collapse, U.S. regulators announced that all deposits at the Silicon Valley Bank would be repaid. This bypasses the Federal Deposit Insurance Corporation’s $250,000 insurance limit on all deposits.
On March 13, HSBC bank announced it would buy SVB’s U.K. division for £1. The strategic acquisition “strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the U.K. and internationally,” HSBC Group CEO Noel Quinn said.
U.S. President Joe Biden said Silicon Valley Bank’s bailout will not be funded by taxpayers and that citizens should “feel confident” about the American banking system, thanks to the regulators’ urgent response to the situation. Biden also highlighted that the people responsible for the bank’s collapse would be held accountable.
The president touted the need for stronger regulation and oversight to ensure the U.S. has a “resilient banking system.”
Lower Rate Hikes Ahead
Silicon Valley Bank’s collapse is expected to slow the Federal Reserve’s aggressive rate hike strategy. Analysts and economists were predicting a 50 basis point rate hike for March, but in the wake of the “recent stress to the banking system,” Goldman Sachs Chief Economist Jan Hatzius expects no rate hike later this month.
DoubleLine Capital CEO Jeffrey Gundlach expects the Fed to enforce a nominal 25 basis points rate hike later this month, to save its “credibility.” But he also expects this to be the last rate hike in the near term.
In anticipation of lower rate hikes, the Dow Jones Industrial Average recovered slightly intraday on Monday, before ending down by 0.3%. The tech-heavy Nasdaq Composite index, on the other hand, rose by 50 basis points intraday.
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