Ua worrying day. This Friday, March 10 will be remembered for the global banking sector with a fall in stock market prices, a consequence of concerns about the difficulties of the American SVB Financial Group, a privileged financial partner of many technology companies.
The American authorities announced on Friday that they had closed the Silicon Valley Bank, which suddenly found itself in difficulty, and had entrusted the control of the deposits to the American agency responsible for guaranteeing them. The latter plans to reopen the bank’s branches on Monday and allow customers to withdraw up to $250,000 in the short term, the amount usually guaranteed by the FDIC.
Electronic trading on the title of the American bank SVB was suspended on Friday, indicated the American Stock Exchange Nasdaq. The establishment is in turmoil after the announcement, Wednesday, March 8, of an emergency capital increase. The SVB unscrewed by more than 60% on Thursday, investors worried about large customer withdrawals, which pushed the bank to this capital increase and to sell in disaster a massive portfolio of financial securities.
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A chain reaction
This “small panic was triggered on the theme of the bankrun”, a chain reaction which begins with massive withdrawals of customers, explains to Agence France-Presse David Bénamou, director of investments of Axiom Alternative Investments. First cause, the announcement Wednesday by SVB Financial Group, parent company of Silicon Valley Bank (SVB), of a major capital increase of 2.25 billion dollars.
In the middle of the morning on the Paris Stock Exchange, the title of Societe Generale lost 4.96% to 25.40 euros, BNP Paribas 3.38% to 60.52 euros and Crédit Agricole 2.94% to 10.97 euros. Elsewhere in Europe, the German bank Deutsche Bank lost 8.08%, the British Barclays 3.83%, the Italian Intesa Sanpaolo 3.06% and the Swiss UBS 4.45%. In Hong Kong, HSBC and Standard Chartered banks lost more than 3% on Friday, Hang Seng Bank more than 4%. Same drift in Japan where the actions of the main Japanese banks were penalized.
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Who is SVB?
Silicon Valley Bank (SVB) is a California banking institution specializing in the technology sector and which mainly does business with funds that invest in unlisted companies. The group, present in the United States, Europe, Asia and Israel, offers a range of financial services to the start-up ecosystem, ranging from simple maintenance of bank accounts to fundraising advice.
SVB prides itself on its site to work with approximately 50% of technology, health and biotech companies backed by US venture capital funds, including the Pinterest and Shopify platforms.
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What difficulties does SVB face?
The commercial bank’s parent company, SVB Financial Group, announced on Wednesday that it would seek to raise $2.25 billion in new money. It has already sold $21 billion in financial securities to obtain immediate cash, at the cost of a $1.8 billion loss.
SVB is thus seeking to strengthen its balance sheet, weakened by customer withdrawals. According to sources cited by the financial news agency Bloomberg, investment funds have advised their companies to withdraw their funds from SVB, accentuating the lack of liquidity.
In response, the managing director of SVB on Thursday urged his customers “not to withdraw their deposits from the bank and not to sow fear or panic”, according to the Wall Street Journal. The group also lowered its financial forecasts for the first quarter of 2023 on Wednesday, in particular its net profit and its net interest margin, that is to say the difference between the rates at which the bank borrows money and those at which she ready.
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Why these difficulties?
Closely linked to technology companies, SVB is suffering as a result of the deterioration of the environment in the sector: the sudden rise in interest rates, supply difficulties, particularly in semiconductors, weak investor appetite for technology stocks and geopolitical tensions signaled the end of the post-Covid euphoria.
The stock market valuation of technology companies has also melted in 2022 and announcements of job cuts in Silicon Valley have been increasing for a few months. The rise in interest rates, under the effect of central bank action, also directly affects banking companies.
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Guardrails
This SVB crisis is in addition to the fact that another American financial player is going through a bad patch: the parent company of Silvergate Bank, which has developed a large clientele in the cryptocurrency community, announced on Wednesday that the establishment would be put into liquidation. This downward movement is in line with Wall Street on Thursday: Bank of America lost 6.20%, Wells Fargo 6.18% and Citigroup 4.10%. Stephen Innes, analyst at SPI Asset Management, wants to be reassuring in a note, estimating “low” the risk “of a capital or liquidity incident among the big banks”.
Since the financial crisis of 2008-2009 and the bankruptcy of the American bank Lehman Brothers, banks have had to give guarantees of solidity to their national and European regulators. They must, for example, justify a higher minimum level of capital intended to absorb any losses. This hard capital ratio, also called CET1, is the work of the Basel Committee in Switzerland.
The European Banking Authority is also subjecting 50 major banks on the continent to stress tests. The results for the last financial year, published at the end of July 2021, showed that the establishments were well able to withstand a serious economic crisis without too much damage.
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Last resorts
There is also a European-wide so-called “single resolution” fund (SRF), funded by the banks and intended to help an institution in the sector in the event of bankruptcy. As a last resort and to avoid a devastating domino effect, governments could be tempted to pull out the portfolio to save an institution deemed too big to fail. too big too fail »).
Analysts also observe that this correction comes after a rather prosperous start to the year for banks on the stock market: the vast majority of them have remained in the green since the start of the year.