Any business that depends on the financial markets for survival should take note of SVB Financial Group’s demise as a result of its inability to raise money. Once a rising star in the banking sector, the company fell on hard times when it was unable to raise money from investors to strengthen its balance sheet. In this article, we’ll look at the circumstances that led to the company’s demise and the lessons that may be drawn from them.
Who is SVB Financial?
SVB Financial Group, sometimes referred to as Silicon Valley Bank, is a financial organization that was established in 1983 with the intention of offering banking services to Bay Area tech businesses. Since then, the bank has grown and currently has customers in a range of sectors, including healthcare, life sciences, energy, and wine. The bank has locations all around the world, and its headquarters are in Santa Clara, California. As of 2021, one of the biggest financial organizations in the US is SVB Financial Group, with assets of over $100 billion.
SVB Was Hit Hard by the Pandemic
The COVID-19 epidemic, however, had a significant negative effect on the bank’s performance. SVB Financial Group, like many other financial firms, was severely impacted by the pandemic-related economic slump. The bank’s profits decreased precipitously, and its stock price declined as a result of businesses closing and investors becoming nervous.
The fact that the bank had a sizable exposure to the IT industry, which was heavily damaged by the pandemic, made problems worse. The bank found it challenging to collect on its loans because many of its customers were struggling startups. In order to avoid defaulting on its debt obligations, the bank had to immediately obtain capital because its balance sheet was already weak.
The bank’s management team started looking into potential capital-raising strategies because they realized they needed to move quickly to get funds. They debated selling off assets, making expense reductions, and possibly joining forces with another organization. None of these alternatives, though, seemed practical, and the bank’s executives quickly understood that they would need to obtain money from investors to keep the bank afloat.
The bank attempted to obtain money but was unsuccessful. Investors were hesitant to fund a financial institution that was primarily dependent on the technology industry because they were concerned about the bank’s ability to withstand the pandemic’s negative economic effects. The bank was consequently obliged to file for bankruptcy since it was unable to raise the capital it required.
The wheels started to come off on Wednesday, March 8, when SVB announced it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. That triggered panic among key venture capital firms, which reportedly advised companies to withdraw their money from the bank.
The company’s stock cratered on Thursday, dragging other banks down with it. By Friday morning, SVB’s shares were halted, and it had abandoned efforts to quickly raise capital or find a buyer. Several other bank stocks were temporarily halted Friday, including First Republic, PacWest Bancorp, and Signature Bank.
It was notable that the FDIC took control at midday rather than its usual time after the market closed.
“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours,” according to Better Markets CEO Dennis M. Kelleher. “That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.”
The Federal Reserve’s rapid interest rate increases during the previous year are a contributing factor in Silicon Valley Bank’s downturn. Banks bought a lot of long-dated, ostensibly low-risk Treasuries while interest rates were close to zero. But the value of such assets has decreased as the Fed raises interest rates to combat inflation, leaving banks with unrealized losses.
According to Moody’s Chief Economist Mark Zandi, higher rates hit the tech industry particularly hard, reducing the value of tech stocks and making it difficult to raise money. That led a lot of Internet companies to use their SVB deposits as operating capital.
“Higher rates have also lowered the value of their treasury and other securities, which SVB needed to pay depositors,” Zandi said. ”All of this set off the run on their deposits that forced the FDIC to takeover SVB.”
The collapse of SVB Financial Group was a wake-up call for the banking industry, which had grown complacent in the years leading up to the pandemic. It demonstrated that even the most successful and innovative institutions can falter if they are not prepared for unforeseen events. The lessons from SVB Financial Group’s collapse are clear: companies need to be proactive in managing their risk exposure, they need to be agile and adaptable in the face of changing market conditions, and they need to be transparent and communicative with investors.