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How Did Silicon Valley Bank Shares Evaporated 60% In One Day?
Silicon Valley Bank SVB Financial Group $SVB Financial (SIVB.US)$ fell 60% more was caused by the management’s letter released on Thursday. The letter stated that the company has sold most of its securities and decided to issue 1.75 billion new shares to adjust the company's entire financial structure. The management said the continuous high interest rate, the downward pressure on the market, and the high rate of burning money of customers make them have to take action. Silicon Valley Bank primarily serves start-ups, about half of all tech and bio startups in the U.S.
When interest rates rise, bond prices will fall and depreciate the company's assets. Many start-up companies arenot profitable, which they can’t raise fund and must burn their deposits to stay developing. Depreciation of assets while shrinking deposits may threaten the survival of banks. When the SVB’s news came out, investors came to worry that SVB may go bankrupt. Such panic sparked to all banks, and San Francisco bank First Republic also fell by 15%.
From a rational perspective, if there is no problem with the debts of small banks, the risk is relatively controllable even if the deposits have shrunk, because they can sell the debts to large banks to withdraw funds. The only problem is that banks like SVB have lent a lot of money to these start-up companies. Once the start-up companies go bankrupt on a large scale and lead to large-scale debt defaults, the credit risk of these small banks may be more serious. But so far we have not seen such a risk occur.
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