Why is everyone talking about Silicon Valley Bank?

Silicon Valley Bank headquarters in Santa Clara, California, US, on Thursday, March 9, 2023. SVB Financial Group bonds are plunging alongside its shares after the company moved to shore up capital after losses on its securities portfolio and a slowdown in funding. Photographer: David Paul Morris/Bloomberg

The startup world was thrown into chaos this week 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 (SVB) announced a share sale to shore up its finances, following a significant loss on its portfolio. So what does SVB bank do and why has it sparked panic?

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 $2.25bn (€2.12bn) share sale to shore up finances. The move was prompted by high deposit outflows at the bank due to a broader downturn in the startup 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.

What effect has it had on SVB?

SVB's stock plunged 60% on 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%, the most in nearly three years.

Major US banks including Bank of America, Wells Fargo and JPMorgan Chase all slid at least 5%.

Who are the SVB’s clients?

SVB is deeply embedded in the US startup scene, as the only publicly-traded bank focused on Silicon Valley and tech startups. It lists Pinterest, Shopify and cybersecurity firm CrowdStrike Holdings among the bigger household names it has served.

What could happen next?

Startups 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.

Bloomberg