Silicon Valley Bank: What is it and how does it affect the technology sector?

Silicon Valley Bank: What is it and how does it affect the technology sector?

The U.S. bank Silicon Valley Bankunder the control of the U.S. authorities as of Friday due to “insolvency”, is an institution closely linked to the technology hit by the decline of that sector.

California’s Department of Financial Protection and Innovation (DFPI) closed the. SVBbased in that state, and appointed the Federal Deposit Insurance Corporation (FDIC) as depositary for the bank’s funds, the federal agency said Friday.

DFPI “took possession of the Silicon Valley Bankciting inadequate liquidity and insolvency,” the California agency said.

What is SVB?

The Silicon Valley Bank (SVB) is a California bank specializing in the technology sector, doing business primarily with funds that invest in unlisted companies.

Little known to the public, it is the sixteenth largest U.S. bank by asset size.

The firm, with operations in the United States, Europe, Asia and Israel, offered financial services among others to startups, from simple bank accounts to advice on how to capitalize.

What was the distressed bank looking for?

The parent of this bank, SVB Financial Group, announced on Wednesday that it would seek to raise $2.25 billion in fresh funding

The group quickly sold a $21 billion portfolio of financial securities at an estimated loss of $1.8 billion.

SVB was seeking to strengthen its finances, fragilized by customer withdrawals, until the announcement from federal and state authorities on Friday.

According to The Wall Street Journalciting sources close to the banking industry, investment funds have advised companies to withdraw their money from SVB and, in reaction, the bank’s CEO on Thursday urged its customers “not to withdraw their deposits and not to spread fear or panic.”

On Friday morning, the stock price of SVB was suspended on the New York Stock Exchange pending a communication from the company, following a 60% drop in its shares on Thursday and a decline of more than 60% again in electronic trading prior to the open.

According to the economic channel CNBCThe bank was unable to raise the necessary capital and was negotiating its sale to another bank.

The bank’s 17 branches will reopen Monday under the control of a new entity specifically created by the FDIC to manage the institution’s operations.

Why is SVB in trouble?

Closely linked to the technology companies, the SVB suffers from the deterioration of the sector: the sharp rise in U.S. interest rates affecting an industry heavily dependent on financing for growth, coupled with semiconductor sourcing difficulties and weak investor appetite for technology stocks, mark the end of the post-pandemic technology euphoria.

The market capitalization of technology companies collapsed in 2022, and announcements of mass layoffs among Silicon Valley firms have been multiplying for months.

The interest rate hike resolved by the Federal Reserve (Fed, central bank) also affects banking institutions.

Banks take short-term money to grant medium- and long-term loans, a pattern that hurts their prospects in a context of high rates.

Why are tech companies suffering?

The problems of a single bank can affect investor confidence in the sector worldwide.

Banks are interdependent, as the 2008-2009 financial crisis and the failure of Lehman Brothers bank showed.

The specter of a “bank run,” a chain reaction that begins with massive customer withdrawals until banks are unable to respond, always looms over the sector.

To meet the demand for cash, the bank has no choice but to raise money or divest assets quickly, which usually entails expenses or losses, and accentuates its difficulties.

At the end of 2022, the bank had $209 billion in assets and about $175.4 billion in deposits, officials said.(AFP)

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Daniel Chapman