Financial markets prepare for impact as Silicon Valley Bank’s ‘death spiral’ leads to up to 50% drop in bank stocks

Silicon Valley Bank’s sudden collapse has caused a stir in the financial markets. Regulators in California shut down the bank last Friday after a run on deposits left it in crisis, marking the largest US bank failure since the 2008 Great Recession. Its niche specialization in supporting tech startups made it more vulnerable than its larger competitors. However, experts caution that more firms may face similar troubling times ahead.

The impact of SVB’s collapse has already affected similar institutions such as New York’s Signature Bank, which saw its share price drop 23 percent before trading was halted. University of San Diego finance professor Dan Roccato suggests that we may see a few more banks experience similar situations.

The fallout from SVB’s collapse is felt beyond Wall Street. The share price of First Republic, the 16th largest bank in America, fell 14.8 percent, and Pac West dropped by 37.9 percent. Streaming giant Roku, for example, reported that 26 percent of its cash reserves, over $480 million, were tied up in SVB, resulting in a 42 percent decline in the company’s stock since last year.

Rippling, a human resources management firm that handles payrolls for other institutions, announced that it was unable to immediately pay its clients’ employees due to the market turmoil. Some have laid the blame for the turmoil at the door of the Federal Reserve, which has been drastically increasing interest rates since last year in an attempt to combat inflation.

The bank’s collapse has a significant impact on startups, which were the bedrock of SVB. The deposits of these startups doubled in 2021, helping SVB aggressively expand its loan portfolio. However, the bank’s failure to cover its costs amid rising interest rates led it into a ‘death spiral.’ In the face of a cash burn from dwindling deposits, SVB was forced to sell off its bond holdings at a $1.8 billion loss. The bank announced plans to seek $2 billion from investors to cover the shortfall.

As a result of SVB’s demise, startups have suddenly found themselves struggling to make ends meet. Karen Petrou, managing partner of Federal Financial Analytics, a Washington consultancy, warns of adverse consequences such as microeconomic harm and social welfare harm.

SVB’s collapse, which was the second-largest bank collapse in US history, leaves customers fearful of losing deposits totaling tens of billions of dollars.

Investors in other regional banks, such as First Republic Bank, quickly jumped ship, with the firms’ share prices dropping upwards of 50 percent on Friday before recovering to 14.8 percent at market close. Although the big players, such as JPMorgan Chase and Bank of America, can weather the storm, some have seen their share prices drop by as much as 11.8 percent in just the last week. However, experts are confident that they can overcome the current situation.

In conclusion, while SVB’s collapse was a niche bank, more firms may face similar situations. Startups, which were SVB’s mainstay, now find themselves struggling. While big players can weather the storm, their share prices have also taken a hit.

Finally, the Federal Reserve’s drastic increase in interest rates is being blamed for the turmoil, leading to more speculative investors in jeopardy.