Image credit: The economic times
Title: Bank Shares Slide as Silicon Valley Bank’s Troubles Trigger Wider Fears
Shares in banks around the world have taken a hit as concerns grow over the health of the financial sector. The troubles began when Silicon Valley Bank (SVB), a key lender to technology start-ups, announced plans to shore up its finances. The news sent its shares plummeting, with the four largest US banks losing more than $50bn in market value. The effects of the SVB announcement were felt across the world, with bank shares in Asia and Europe falling sharply on Friday.
Among UK banks, HSBC shares fell 4.8%, and Barclays dropped 3.8%. SVB saw its shares suffer their largest one-day drop on record as they fell by more than 60% and lost another 20% in after-hours trade. The bank had announced a $2.25bn (£1.9bn) share sale to boost its finances, following losses of around $1.8bn from offloading a portfolio of assets, mainly US government bonds.
The situation at SVB has raised concerns for start-ups that hold money with the bank. Some have been advised to withdraw funds, leading to anxiety among venture capitalists, with some reportedly telling their portfolio companies to pull their funds.
A crucial lender for early-stage businesses, SVB is the banking partner for nearly half of US venture-backed technology and healthcare companies that listed on stock markets last year. While the bank did not respond immediately to a BBC request for further comment, some observers have suggested the issue may be linked to the value of bonds held by banks.
As central banks, including the US Federal Reserve and the Bank of England, have sharply increased interest rates to curb inflation, banks, which tend to hold large portfolios of bonds, are sitting on significant potential losses. The value of bonds held by banks is falling, as rising interest rates make them less valuable. If lenders are forced to sell the bonds they hold at a loss, it could impact their profits.
"The banks are casualties of the hike in interest rates," said Ray Wang, founder and CEO of Silicon Valley-based consultancy Constellation Research. "Nobody at Silicon Valley Bank and in a lot of places thought that these interest rate hikes would have lasted this long. And I think that's really what happened. They bet wrong."
The ripple effect of the problems at SVB, according to Russ Mould, investment director at AJ Bell, "often hint at vulnerabilities in the wider system". "The fact SVB's share placing has been accompanied by a fire sale of its bond portfolio raises concerns. Lots of banks hold large portfolios of bonds, and rising interest rates make these less valuable. The SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income [bond] holdings."
The situation is a timely reminder that the financial sector remains vulnerable, particularly to changes in central bank policy, and investors and regulators will be watching developments closely in the weeks ahead.
0 Comments