The start-up world was thrown into chaos Thursday when a lender little-known outside of Silicon Valley sparked a wave of panic in tech circles that dragged down banking shares around the world.
Events snowballed after Silicon Valley Bank announced a share sale to shore up its finances, following a significant loss on its portfolio. After that, things went rapidly downhill. So what does SVB bank do and why has it sparked panic? Here's everything we know right now — and what could happen next:
What’s happening at SVB?
Santa Clara-based SVB’s ordeal began after its parent company, SVB Financial Group, announced that it sold $21 billion of securities from its portfolio and said it was holding a $2.25 billion share sale to shore up finances. The move was prompted by high deposit outflows at the bank due to a broader downturn in the start-up industry, analysts say. SVB also forecast a sharper decline in net interest income.
All of that spooked a number of prominent venture capitalists, including Peter Thiel’s Founders Fund, Coatue Management and Union Square Ventures, who, according to sources, instructed portfolio businesses to limit exposure and pull their cash from the bank. Other VC firms have asked portfolio companies to at least shift some of their cash away from the bank, while a number have indicated they will stand by SVB.
What effect has it had on SVB?
SVB's stock plunged 60 per cent Thursday and its bonds posted record declines. SVB Chief Executive Officer Greg Becker held a conference call with the bank’s clients, including venture capital investors, urging them to “stay calm” in a bid to avoid a run on the bank.
How did SVB’s woes spread?
SVB's problems coincided with the abrupt shutdown of Silvergate Capital Corp., with the twin shocks sending ripples through the banking industry and pushing stocks lower. The KBW Bank Index — a benchmark of banking stocks — sank 7.7 per cent, the most in nearly three years.
Major US banks including Bank of America Corp, Wells Fargo & Co and JPMorgan Chase & Co all slid at least 5 per cent, while shares of Asian banks later followed their Wall Street peers lower.
Who are the SVB’s clients?
SVB is deeply embedded in the US start-up scene, as the only publicly-traded bank focused on Silicon Valley and tech start-ups. According to its website, it does business with nearly half of all US venture capital-backed start-ups, and 44 per cent of US venture-backed tech and health-care companies that went public last year.
It lists Pinterest Inc., Shopify Inc. and cybersecurity firm CrowdStrike Holdings Inc. among the bigger household names it has served.
What could happen next?
Start-ups withdrawing funds are on the lookout for other lenders where they can park their cash, while investors in financial firms are closely watching other banks that may also be affected by malaise. It’s unclear what will happen when US markets reopen. Pershing Square Holdings founder Bill Ackman has proposed a US government bailout to save SVB.
What's the worst-case scenario?
The worst-case scenario for any bank is that it ends up with too little cash to operate or suffers enough losses to erode its capital, prompting regulators to sell the bank to a stronger rival or wind it down. But SVB's stock sale should help to prevent that. Time will tell.