Is a financial crisis developing in the US banking system after Thursday saw the biggest shakeout in financial stocks for three years with two banks especially in the spotlight?
Hours after Silvergate Bank – which had been a cornerstone in the crypto world – collapsed with massive but unquantified losses, shares in SVB Financial Group (parent of Silicon Valley Bank) fell 60% on Thursday and another 31% in afterhours trading after it revealed deep financial problems.
Both banks are in trouble for one major reason – over reliance in one area of business – Silvergate, with its lending and dealing with crypto companies; SVB, lending money to Silicon Valley start-ups.
Both areas have gone backwards in the past year – crypto after the string of collapses in the sector and the start-ups have been hit by high inflation and the impact of the Fed’s string of interest rate rises.
The problems at both banks are not what US regulators like the Fed or US markets want to see with the return of fears about a recession and pressures on corporate earnings and cash flows if the fed keeps interest rates higher for longer.
The involvement of SVB in this crisis will add to investor fears about the financial health of the tech sector which has been a source of rising concern thanks to tens of thousands of job losses, reports of weak revenue growth, and weak management.
After its stock soared 75% in the 2021 market rally, SVB lost two-thirds of its value last year and then plunged on Thursday and an additional 31% after the close.
And we are not talking about a small local or regional bank as the New York Times reported on Friday:
“If Silicon Valley Bank failed, it would be the second-largest such unravelling in U.S. history, smaller only than the run on Washington Mutual during the 2008 financial crisis, when that bank had roughly $US300 billion in customer deposits. At the end of last year, Silicon Valley Bank reported $212 billion in customer assets.”
The collapse of Silvergate and problems at SVB spilled over into the share prices of other banks.
Shares in First Republic Bank in California fell 16.5% Signature Bank in New York more than 12% and Zions Bancorporation 11.4%.
Bigger banks also suffered. Bank of America and Wells Fargo dropped 6.2% while JPMorgan Chase fell 5.4%.
The KBW bank index, which tracks the Wall Street listed shares of 24 major banks, fell nearly 8% percent, the worst one-day move since June 2020 in the early stages of the coronavirus crisis.
The New York Times went on to report: “Panic swept through the start-up industry on Thursday as investors at some venture capital firms urged portfolio companies to move their money from Silicon Valley Bank over concerns about the tech industry stalwart’s financial stability.”
