Shares of banks all over the world have fallen as a result of concerns about a wider financial industry issue being raised by problems at one US bank.
Following the announcement of measures to strengthen its finances on Thursday, shares of Silicon Valley Bank (SVB), a significant lender to technology start-ups, fell sharply.
The four biggest US institutions suffered a knock-on loss of market value of more than $50 billion as a result of this.
On Friday, bank shares dropped significantly in both Asia and Europe.
HSBC shares decreased 5.6%, and Barclay shares decreased 3.5% among UK institutions.
On Thursday, SVB’s shares experienced their largest one-day decline ever as they fell by more than 60% and lost an additional 20% in after-hours trading.
The decline occurred a day after the bank revealed plans to raise $2.25 billion (£1.9 billion) by selling shares.
After losing about $1.8 billion when it sold a portfolio of assets, primarily US government bonds, SVB started the share offering.
However, what worries the bank more is that some start-ups with money placed have been told to withdraw money.
The scenario is “wild,” Blank Ventures founder Hannah Chelkowski told the BBC. Blank Ventures is a fund that invests in financial technology. She is telling the businesses in her portfolio to stop investing.
“It’s amazing how it just fell apart like this. It’s noteworthy that it’s the bank that supports startups the most through Covid and that it’s the most startup-friendly bank overall. VCs are currently advising their portfolio businesses to stop receiving funding, she claimed.
It is cruel, she continued.
SVB, a significant early-stage lender, is the banking partner for almost half of the US venture-backed technology and healthcare firms that went public last year.
An inquiry for additional comment from the BBC was not quickly answered by SVB.
The reality that bonds held by banks in the larger market lost value as a result of rising interest rates gave rise to worries about the value of those bonds.
In an effort to reduce inflation, central banks around the globe, including the US Federal Reserve and the Bank of England, have sharply raised interest rates.
Banks frequently have sizable bond portfolios, which means they are sitting on sizable possible losses. Unless banks are forced to sell them, value drops in bonds they hold are not inherently a problem.
However, if institutions like Silicon Valley Bank are forced to sell the bonds they own at a loss, it might have an effect on their bottom line.
According to Constellation Research creator and CEO Ray Wang, the banks are suffering as a result of the increase in interest rates, as reported by the BBC.
“Neither Silicon Valley Bank employees nor people elsewhere anticipated that these interest rate increases would last this long. That, in my opinion, is what actually transpired. They placed the incorrect wager,” he continued.
These kinds of incidents “often hint at vulnerabilities in the wider system,” according to Russ Mould, investment director at AJ Bell, who noted the impact of the SVB issues.
“Concerns are raised by the fact that SVB’s share placement was followed by a fire sale of its bond portfolio.
Many banks have sizable bond portfolios, which are becoming less valuable as interest rates rise. The SVB situation serves as a warning that many institutions have sizable unrealized losses on their fixed-income [bond] holdings.
