Silicon Valley Bank turmoil causes market panic: Four largest US banks lose a whopping $52 BILLION in valuation and Dow drops 540 points
- The S&P 500 banking index fell more than 6% on Thursday, the sharpest drop in two years
- Investors fled the financial sector after unrest at SVB Financial Group
- Markets also fell more broadly and the Dow lost 540 points
Sharp losses in banking stocks sent major Wall Street indices lower on Thursday, after turmoil at parent company Silicon Valley Bank sparked investor fears about the stability of the financial sector.
The S&P 500 banking index fell more than 6% in its biggest one-day decline in more than two years after SVB Financial Group announced a massive capital raise to cover a $1.8 billion loss on investment sales.
The four largest US banks – JPMorgan Chase, Bank of America, Wells Fargo and Citigroup – saw their share prices fall between 4% and 6%, wiping $52.3 billion off their combined market caps for the day.
Stocks fell broadly on Wall Street, with the Dow Jones Industrial Average falling 543 points, or 1.66%. The S&P 500 lost 1.85% and the Nasdaq composite fell 2.05%.
Shares of SVB Financial, which owns Silicon Valley Bank, plunged more than 60% after the company announced a sale of new shares to cover losses on government bond sales.
Sharp losses in bank stocks led Wall Street’s major indices to fall Thursday as turmoil at Silicon Valley Bank’s parent company feared investors
SVB is facing cash burn due to declining deposits from tech startups grappling with a drought in venture capital funding.
The company’s assets and deposits had nearly doubled by 2021, and the bank put much of that money into U.S. Treasuries and other government bonds.
But as rising interest rates hit the tech startups the bank primarily serves, falling deposits forced SVB to sell off bond holdings – which had plummeted in market value in the meantime due to the rising interest rate environment.
The turmoil at SVP led to a sell-off among peers of similar exposure, with First Republic’s San Francisco headquarters falling 16.52% after hitting its lowest level since October 2020.
Declines at the huge big four banks, while smaller in percentage, dragged markets down, with JPMorgan’s 5.4% loss outweighing any other stock on the S&P 500.
“The increase in Silicon Valley made everyone nervous about people’s capital levels and what deposits are doing. Many institutional investors are currently uncomfortable with owning certain banks,” said RJ Grant, chief trading officer at Keefe, Bruyette & Bossen in New York.
“It just drives people crazy because Silicon Valley has historically been a very strong, well-run bank. When they have problems now, people wonder what about other banks that are of lower quality and that don’t have the reputation that Silicon Valley Bank has.’
SVB CEO Greg Becker said customer cash burn increased in February.
SVB is a critical lender to early-stage companies and is the banking partner for nearly half of the U.S. venture capital-backed technology and healthcare companies to go public by 2022.
“While VC (venture capital) deployment has followed our expectations, customer cash burn remained high and further increased in February, resulting in lower-than-expected deposits,” Becker said in a letter to investors.
The funding winter is a result of a relentless increase in borrowing costs by the Federal Reserve over the past year, as well as increased inflation.
At one point during Thursday trading, SVB shares fell nearly 63%, hitting the lowest level since August 2016 after the lender lowered its 2023 outlook and launched share sales.
The unrest at the SVB caused investors to worry about the broader risks in the sector.
Investors also struggled with the decline of cryptocurrency-focused lender Silvergate Capital, which fell 22% after saying late Thursday it planned to wind down operations and voluntarily liquidate after it was hit by losses following the collapse of crypto exchange FTX.
Shares in Silvergate peer Signature bank fell 9.4%.