Overnight, global markets find 'big mine' in US banking

Overnight, the US banking industry had a "SIVB moment", Silicon Valley banks suddenly hit a liquidity crisis, the four major banks overnight wiped out $52.4 billion.

Silicon Valley Bank (SVB) is seeking to raise $2.25bn from the sale of common and preferred shares after taking a $1.8bn loss on Thursday morning, when it announced it was selling all $21bn of marketable securities.

Silicon Valley Bank plunged 60% on the news, its biggest drop since 1998, and is now down nearly 23% after hours. It also triggered a broad sell-off in US bank stocks, wiping $52.4 billion off the value of the big Four banks. J.p. Morgan fell 5.41%, Bank of America tumbled 6.2% and Wells Fargo fell 6.18%. Citigroup fell 4.1%. Meanwhile, the Philadelphia Bank Index plunged 7.7%, its worst daily performance since June 2020.

As the panic continues to spread, three groups -- Coatue, USV, and Founder Collective -- are advising companies to pull money out of Silicon Valley banks. Worse, Silicon Valley Bank may be the first domino in the crisis. Other American banks may have to follow SVBS and sell securities at a loss to meet demand for withdrawals.

Deposit loss + bond depreciation "double kill"

Silicon Valley banks are suffering from a combination of deposit losses and bond writedowns.

The securities available for sale at Silicon Valley Bank are essentially a mix of Treasury bonds and mortgage-backed securities, and steep interest rate increases by the Federal Reserve over the past year have caused the value of the bonds to fall -- especially those with many years to mature.

At the same time, as savers sought higher yields in the face of rising interest rates from the Fed, rising paper losses coincided with a decline in bank deposits, leading to a liquidity crisis in SVBS.

As the panic continues to spread, three groups -- Coatue, USV, and Founder Collective -- are advising companies to pull money out of Silicon Valley banks.

Tribe co-founder Arjun Sethi says:

It's important to understand that banks are leveraged and they use deposits. Because the risk is not zero and the cost is small, bank customers would do well to spread it as far as they can.

Us banks have a 'SIVB Moment'

Even scarier, Silicon Valley Bank may have been the first domino in the crisis, as other US banks invested large amounts of their deposits in long-term securities such as US Treasuries during the pandemic.

The SVBS crisis has focused attention on the potential risk that other banks may have to follow suit and sell securities at a loss to meet demand for withdrawals.

Analysts say the liquidity crisis at Silicon Valley Bank has spooked investors because it has historically been a very strong, well-run bank. If even Silicon Valley Bank is having problems now, investors can't help but wonder what will happen to other banks with less assets and reputation than Silicon Valley Bank.

Wells Fargo analyst Mike Mayo described the sell-off as a "SIVB moment" for U.S. banks (Silicon Valley Bank parent SVB Financial trades under the ticker SIVB), saying:

The problems at Silicon Valley banks appear to have been caused by a "lack of investment diversification". Higher interest rates, recession fears and a cold IPO market have made it harder for startups to raise money.

While the weakness of Silicon Valley banks is not indicative of the industry as a whole, it is still affecting investor sentiment.

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