New Delhi: The shutdown and acquisition of SVB Financial Group Inc by banking regulators on Friday can be traced to a rise in interest rates by the US Federal Reserve and a decrease in investors’ risk appetite.
Here is the sequence of events that led to the failure of Silicon Valley Bank:
Federal Reserve Raises Rates
The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when higher rates make the money available to them costlier. This weighed on technology startups – Silicon Valley Bank’s primary customers – as it made their investors more risk-averse.
Some customers of Silicon Valley Bank are facing a cash crunch
As high interest rates shut out the market for initial public offerings for many startups and made private fundraising more expensive, some of Silicon Valley Bank’s clients began withdrawing money to meet their liquidity needs. Gave. That culminated in the Silicon Valley bank this week looking for ways to meet its customers’ withdrawals.
Silicon Valley Bank sells bond portfolio at a loss
To fund the redemptions, the Silicon Valley bank on Wednesday sold a $21 billion bond portfolio, mostly comprised of US Treasuries. The portfolio was giving it an average return of 1.79%, which is well below the current 10-year Treasury yield of around 3.9%. This forced SVB to recognize a $1.8 billion loss that needed to be filled through capital raising.
SVB announces stock sale
SVB announced Thursday that it will sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading down 60% that day, as investors feared deposit withdrawals could prompt it to raise more capital.
stock sales fall
Some SVB customers pulled their money out of the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, Reuters reported. It spooked investors like General Atlantic that SVB stock was up for sale, and the capital-raising effort fell through late Thursday.
svb goes to receipt
SVB scrambled to find alternative funding, including the sale of the company, on Friday. Days later, however, the Federal Deposit Insurance Corporation (FDIC) announced that SVB had been closed and placed under its receivership. The FDIC said it would seek to sell SVB’s assets and that future dividends could be paid to uninsured depositors.