The Silicon Valley Bank debacle affects banks inside and outside the US

The debacle of the Silicon Valley Bank (SVB), which has been intervened after its shares collapsed in two consecutive days due to its serious financial problems, has affected the entire sector outside and within the United States this Friday and has awakened the fear of some investors that it constitutes the prologue of a new crisis.

Shares of SVB – a bank focused mainly on emerging, technological and scientific companies – plunged 60% on Thursday and fell another 68% on Friday, before its listing was suspended.

Subsequently, the California Department of Financial Protection and Innovation, where the bank’s headquarters are located, has taken control of the company, alleging lack of liquidity and insolvency, with the aim of protecting deposits insured by the Government.

CONCERN AMONG THE INVERSORS

The fall of SVB, which had assets of approximately $209 billion and deposits worth approximately $175.4 billion as of December 31, 2022, is the largest bank failure since the 2008 crisis and one of the largest. in United States history.

The sudden collapse of the entity based in Santa Clara (California, USA) has caused mixed reactions among investors.

On the one hand, those who see what happened as the warning of a new financial crisis and, on the other, those who blame their debacle on problems that concern the company itself and that will not spread to the sector or the rest of the economy.

"Interest rate hikes are slowing the economy and that is weighing on the US economy"said economist Lauren Goodwin, from the New York Life Investments firm, quoted by The New York Times.

for Goodwin "what is happening to the banking sector is indicative of what investors fear may happen to other parts of the economy if interest rates continue to rise".

THE ORIGIN OF BLS PROBLEMS

SVB had invested the excess liquidity achieved during the covid-19 crisis in long-term Treasury Bonds, assets that have been affected by the rise in interest rates sponsored by the Federal Reserve.

According to MarketWatch, the bank was not well positioned to deal with rising interest rates and slowing loan growth.

The bank, focused on granting loans and capturing deposits from venture capital companies, said on March 8 that client cash spending had remained high and had continued to rise in February, causing "lower-than-expected deposits".

Faced with this situation, on Wednesday, the entity announced the sale of some 21,000 million dollars in assets from its portfolio (bonds), in which it lost 1,800 million and after which it proposed a plan to execute a capital increase of about 2,250 million dollars to offset the loss.

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SVB’s objective, according to various specialized media, was to increase its assets to "take advantage of the potential for rising interest rates in the short term, partially lock in financing costs, better protect net interest income (NII) and net interest income (NIM) and improve profitability".

But to the fall caused by the sale, was added the fact that several investment advisory companies recommended emerging companies to withdraw their capital from the bank, which redoubled the pressure on the entity that this morning has been intervened.

CONTAGION TO OTHER BANKS

Its fall, in addition to sparking concern among investors, has affected the rest of the financial sector inside and outside the United States.

Yesterday, several financial institutions were dragged down, such as Signature Bank, First Republic Bank or Western Alliance, and their listing on the stock market was suspended due to their falls.

According to The Wall Street Journal, investors are punishing companies that have bet on potentially difficult deals, such as PacWest Bancorp, which was down more than 30% today.

Both the latter and First Republic have focused their loan portfolio on the real estate sector and also, in part, on venture capital firms.

Likewise, the specialized channel CNBC assured that investors are looking closely at institutions that, like the SVB, have opted for long-term Treasury Bonds.

The main US financial corporations, for their part, were also affected, such as JPMorgan Chase, which lost 5% yesterday, and Goldman Sachs, whose titles fell 2%, although three hours after closing the shares of most of the major banks seemed to stabilize.

JPMorgan Chase rebounded 1.68% at 1:15 p.m. local time, Bank of America lost 0.61%, Citigroup fell 0.39%, and Wells Fargo gained 0.67%, while others such as US Bancorp ( -3.78%) and Goldman Sachs (-3.41%), continued to register significant falls. European financial institutions also suffered heavy losses this Friday due to the SVB crisis.

In Spain, Banco Sabadell and Santander lost more than 5%; in the London parquet, HSBC -the first bank in Europe by capitalization- also left more than 5%, together with Barclays; while in Frankfurt the losses were led by Deutsche Bank, with more than a 7% drop, while Commerzbank was left around 2.5%.

 

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