It's not often we see a run on a bank, where depositors desperately try and retrieve their funds from a financial institution in trouble. This rarely happens in the highly regulated U.S. bank scene, but that's where we found ourselves with SVB Financial Group (SIVB) and its Silicon Valley Bank.
It won't end well for Silicon Valley Bank, in fact the FDIC shut the bank down Friday. Creditors are circling around to see what may be left if the equity is destroyed. The stock was halted early in the day after an 86% drop in a few sessions.
There are several reasons why this bank is about to go belly-up, and some we may not know for some time. But the immediate issue has to do with a lack of adjusting to a new interest rate environment.
Now, if you did not know the Federal Reserve has been raising rates for a year, then you've been sleeping under a rock. Since about a year ago, the Fed has raised the fed funds rate from zero to the current level of 4.5%. The central bank's FOMC committee is very hawkish and will continue to raise this key rate until inflation starts to come down towards their 2% objective.
One of the biggest concerns for Silicon Valley Bank and its customers was access to capital, collateral and cost of funds. With higher interest rates the borrowing rate has risen.
What is truly remarkable is how SIVB's bank management did not see this coming. Or, maybe they did! There's been plenty of insider selling of shares over the past couple of months. However, given the conditions in the marketplace, the bank should have taken more precautions. SIVB makes loans to customers who are startup companies. These businesses thrive during strong economic times, but are challenged at times of recession or economic downturns.
But the shocking news Thursday that the company needed to sell stock to raise serious capital was disturbing and brings up memories of the Great Financial Crisis in 2007-2009. That was a time of loose controls, high-risk taking and misunderstanding of the housing market. The markets fell hard during that time period, as systemic problems within the banking system almost knee-capped the entire world's financial system. At the time, a bailout was considered the only/best solution, and against moral hazard rules the government gave in to the banks.
They swore it would never happen again, no matter how big the crisis. Well, here we are again with a well-funded bank with big stakeholders facing the same fate as Bear Stearns or Lehman Brothers.
Other banks are selling off as nervous investors step back to see how things unfold. Fixed income (SIVB bonds) is selling at near pennies on the dollar. Certainly a restructuring is needed or perhaps a takeover is coming, but it won't be at a premium price.
Next week there might be some resolution to the Silicon Valley Bank story. It might actually be resolved over the weekend, as bankers and regulators determine if there is enough value to purchase the crippled bank.
Markets around the world await for that next shoe to drop, and if the market reaction this week is any indication, it'll be a long week!
