SVB Financial Group (SIVB) shares were halted by officials on the Nasdaq Friday, while its Silicon Valley Bank was shut down by California regulators, following a liquidity crunch that triggered an emergency capital increase and raised concerns for the value of billions in Treasury bonds held in bank portfolios around the country.
The California Department of Financial Protection and Innovation said the Federal Deposit Insurance Corporation had been appointed receiver to the bank, adding that branches will be closed until March 13.
"The FDIC will pay uninsured depositors an advance dividend within the next week," the regulator said. "Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."
SVB Financial, which does business as Silicon Valley Bank and lends money to tech start-ups, is attempting to raise around $2.25 billion in new equity -- including a convertible stock issue -- in order to shore-up a $1.8 billion hole in its balance sheet caused, in part, by losses in a $21 billion Treasury bond portfolio.
CNBC reported Friday that the capital increase had in fact failed, and plans to sell the business to a financial buyer were being complicated by an accelerating outflow in deposits.
The group also noted an eroding deposit base, given the marked slowdown in venture capital markets, as well as ongoing pressure on its profit margins linked to the impact of relentless central bank rate increases. SVB's first quarter 'on-balance-sheet' deposits were down around $5 billion from the three months ending in December, while average client funds were down by around $15 billion.
SVB Financial shares, which plunged 60.4% yesterday -- the most in two decades -- were marked 45.5% lower in pre-market trading to indicate an opening bell price of $57.81 each after being halted on the Nasdaq.
The SVB slump ignited worries of contagion across the U.S. financial sector, with a key benchmark of shares falling 7% -- the most since June of 2020 during the Thursday session -- and the S&P 500 banks index slumping 6.6% to mid-October lows.
On Friday, a host of regional bank stocks were halted from trading after falling sharply at the opening bell, including PacWest Bancorp (PACW), First Republic Bank (FRC), Signature Bank (SBNY) and Western Alliance Bancorp (WAL).
The affect of SVB's deposit base decline was exacerbated, in part, by losses in SVB's Treasury portfolio, which has been declining in value for much of the year amid the Fed's ongoing rate hikes, which have lifted the Fed Funds rate from around 0% last year to its current rate of 4.5%.
That very condition, in fact, was highlighted as a potential banking system risk by Carl White, a senior vice president for supervision at the St. Louis Fed, who put the value of high-rated bond holdings -- mostly mortgage-backed securities and Treasuries -- at around 25% of bank-sector assets.
In a blogpost published last month, just as Treasury yields began to climb following hotter-than-expected inflation data and the blowout January jobs report, White warned that while rising rates could support margins on bank loan books, "hey also could increase the cost of liabilities and decrease the value of investment securities held as assets."
"Even unrealized losses in investment portfolios can have negative effects on liquidity and present funding challenges, earnings pressures and, in some cases, issues with capital," White said. "Other possible consequences of significant unrealized losses include reductions in or restrictions on borrowing capacity and declining market valuations of the affected institutions, which could have a negative impact on banks looking to engage in merger and acquisition activities."
Bank of America's closely-tracked Flow Show report put the year-to-date decline on government bond portfolios at around 1.3%, thanks in part to the 290 rate hikes executed by global central banks over the past year.
With venture capital markets largely frozen, new lending in the doldrums, SVB was unable to take advantage of the net interest margin advantage offered by higher interest rates, and cautioned earlier this week that net interest income is likely to decline in the mid 30% range from last year's levels -- nearly double its prior decline forecast -- and lowered the revenue guidance from its securities business.
CEO Gregory Becker held an emergency call with investors late Friday, urging them to support the capital increase, while reports have suggested that a key backer, Peter Thiel’s Founders Fund, is asking portfolio companies to take their money out of the Santa Clara-based bank, noting that while it was comfortable with the long-term prospects for the bank's deposit base "the shorter term is hard to predict.”
