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Silicon Valley Bank stocks gets down

Shares in banks around the world tumbled after Silicon Valley Bank (SVB), a key lender for tech startups, announced its plans to boost its finances. This led to concerns about potential problems in the financial sector, causing a significant decline in bank shares worldwide, with the four largest US banks losing over $50 billion in market value. SVB's share value plummeted by over 60%, with a further 20% decline in after-hours trade.

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After one US bank experienced financial difficulties, concerns about potential issues within the financial sector led to a decline in the value of bank shares worldwide.

On Thursday, Silicon Valley Bank (SVB), a key lender for tech startups, caused alarm by announcing its plans to bolster its finances. Consequently, SVB shares plummeted, and the four largest US banks lost over $50 billion in market value.

This trend continued in Asia and Europe on Friday, with bank shares recording a significant decline. In the UK, HSBC shares fell by 5.6%, while Barclays experienced a 3.5% dip.

SVB shares recorded their largest one-day decline in history on Thursday, dropping over 60%, with a further 20% decline in after-hours trade. The drop occurred the day after the bank announced a $2.25 billion (£1.9 billion) share sale to strengthen its finances.

Following the offloading of a portfolio of assets, mainly consisting of US government bonds, SVB suffered a loss of around $1.8 billion. As a result, the bank launched a share sale to shore up its finances.

The situation has become more worrying for SVB, with some start-ups who have deposited funds being advised to withdraw them. Hannah Chelkowski, the founder of Blank Ventures, a financial technology investment fund, described the situation as “wild” and has advised companies in her portfolio to withdraw their funds.

USA flag and American dollars. American flag blowing in the wind and 100 dollars banknotes in the background.

Chelkowski highlighted the irony that SVB is considered the most start-up friendly bank and has supported start-ups significantly throughout the Covid pandemic, but now venture capitalists (VCs) are telling their portfolio companies to pull their funds. “It’s brutal,” she added.

As a vital lender for early-stage businesses, SVB is the banking partner for almost half of the US venture-backed technology and healthcare companies that listed on stock markets in 2022.

At the time of reporting, SVB had not yet responded to a request for further comment from the BBC.

The wider market expressed concerns about the value of bonds held by banks due to rising interest rates, which reduced the value of those bonds. Central banks worldwide, including the US Federal Reserve and the Bank of England, have significantly raised interest rates in an attempt to combat inflation.

As banks typically hold vast portfolios of bonds, they are at risk of significant potential losses. The decline in the value of banks’ bond holdings is not necessarily an issue unless they are compelled to sell them. However, if banks like SVB must 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, in a statement to the BBC.

According to Ray Wang, founder and CEO of Silicon Valley-based consultancy Constellation Research, the extended duration of the interest rate hikes took many, including those at Silicon Valley Bank, by surprise. “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,” he said.

Russ Mould, investment director at AJ Bell, remarked that the ripple effect of the troubles at SVB demonstrated that such events frequently highlight vulnerabilities in the broader 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.”

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