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Financial Bulletin

Silicon Valley Bank Crisis Fallout: Fed considers tightening Regulation of Midsize Banks, Water relief Is over?

Release Time:2023-03-15

Analysts say Silicon Valley Bank's share sale ignores the lessons of previous banking recapitalisations.


On the evening of March 8, Silicon Valley Bank announced plans to raise $2.25 billion through an emergency offering of common stock, preferred stock and private placement, led by Goldman Sachs, with General Atlantic agreeing to buy $500 million of common stock at the offering price. It was a rescue plan tailor-made for Silicon Valley banks.


Fortunately, Silicon Valley Bank has raised more than the $1.8 billion it lost selling almost all of its "available for sale" (AFS) bond portfolio. But by the next day, the offering had spectacularly failed: depositors withdrew their money, the share price collapsed, and investors were unwilling to buy the shares at any price.


Craig Coben, former global head of equity capital markets at Bank of America and managing director at financial services firm Seda Experts, wrote in a column published Tuesday that while it is too early to discuss whether Silicon Valley Bank is insolvent or could have avoided bankruptcy, But the share issue appears to ignore a key lesson from the 2008-2009 banking recapitalisation.


Coben was involved in several banking recapitalisations during the European financial crisis. In volatile capital markets, he argues, "there is a fine line between stupid and smart". A few guiding principles are crucial. One is to raise more equity than you need and more than regulators require, and not just plug the funding gap; Second, equity issues must be underwritten.


On both counts, but especially on the second, Silicon Valley Bank's share offering failed.


Silicon Valley Bank announced earlier that it sold $21 billion of bond investment assets, suffered a $1.8 billion after-tax loss due to rising interest rates, so it plans to raise $2.25 billion through common stock, preferred stock, private placement and other ways to cover the loss.


Wall Street has previously mentioned that, in normal times, Silicon Valley Bank's financing announcement will not cause much association, but at the same time, "coin friendly bank" Silvergate also announced the collapse. Imagine this: While news of a banking explosion in the currency world is still rolling on television, a big bank with a history of nearly 40 years is announcing huge losses and a need to raise capital. This will obviously lead to speculation that the big bank is suffering from a liquidity crisis and is desperate to raise money.


Investors learned as early as the 2008 financial crisis that banks' problems are rarely isolated or effectively contained.


The bigger problem, according to Coben, is that Silicon Valley's offering was not underwritten or subscribed. Ideally, Goldman would have a "Wall-Crossing" conversation with a small group of investors ahead of the offering. This is a process of disclosing material non-public information to investors and secretly sounding out their interest in participating in a deal.


But the best Goldman could come up with was a $500m cornerstone order from General Atlantic, an advance order that plays an important role in a successful offering. Perhaps it was a lack of time, maybe other investors didn't like the deal, maybe Silicon Valley Banks and Goldman Sachs didn't think they needed to do it, and the General Atlantic order was enough to calm the market, Coben said.


The irony, Coben said, is that if Silicon Valley Bank had been a European bank, there would have been a better chance of saving it from bankruptcy. In rights issues, investment banks underwrite new shares at a 30-40 per cent discount to the dilution-adjusted share price. The important thing is that, come what may, the benefits are guaranteed. Rights issues enabled most European banks to recapitalise during the last financial crisis.


Coben also noted that Silicon Valley Bank's offering is undeniably difficult to execute. Us investors are largely unfamiliar with this mechanism, and when panic sets in, it is hard to have confidence in a new structure. But that just goes to show that no one has enough power to calm market nerves that Silicon Valley Bank will survive the crisis.


Risk warning and disclaimer clause

The market is risky and investment needs to be cautious. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation or needs of individual users. Users should consider whether any opinion, opinion or conclusion in this article fits their particular situation. Invest accordingly at your own risk.

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