Start of bank panic in the United States: short of cash, the company specializing in venture capital financing in California, Silicon Valley Bank (SVB), had to in a hurry liquidate part of its portfolio of Treasury bills and bonds for 21 billion dollars (19.8 billion euros), collect a loss of 1.8 billion dollars and launch a capital increase to bail out up to 2.25 billion dollars.
The announcement was made Wednesday, March 8 in the evening and the action of the company, which finances half of Silicon Valley, collapsed on the stock market the next day by 60%. It lost an additional 20% in informal trading after markets closed on Thursday.
The contagion has spread to other Wall Street banks: on Thursday, the top four US institutions – JP Morgan, Bank of America, Wells Fargo, Citi – together lost $ 52 billion in capitalization, while the KBW bank index lost fell 7%, its largest drop since June 2020 in the midst of the Covid-19 crisis.
What happened ? It all goes back to the time of the health crisis and the zero interest rate policy of the Federal Reserve (Fed, central bank of the United States). American start-ups then raise capital en masse, at a time when money is flowing, and they deposit it in their bank, the Silicon Valley Bank, whose assets will double in 2021. This, logically, reinvests them. in theoretically risk-free assets – US Treasury bonds or bonds issued by US public institutions that are yielding almost nothing in this period of free money.
“We may have found our Enron”
This is to neglect the risk linked to rates: since March 2022, the Fed has raised its rates sharply – they are now above 4.5%. Logically, the market value of Treasury bills held by the bank has fallen – when rates rise, operators buy new, more profitable securities and sell those that yield almost nothing. It’s not a big deal if the bank can hold its bonds until maturity and get reimbursed, but the Silicon Valley Bank does not have this latitude: many start-ups, unable to raise capital in times of expensive money and financial dearth, are reduced to burning the cash they hold in the bank and asking for their money.
The ill-fated Silicon Valley Bank, for fear of having a cash crisis, abruptly sold its portfolio of Treasuries with a loss of 8.5% (1.8 billion dollars out of 21 billion), which is considerable for rate products. It still has a $91 billion portfolio of bonds left that it has planned to hold until maturity and whose current market value is only $76 billion.
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