During Thursday’s market closing, shares of Silicon Valley Bank (SVB), a crucial lender to tech firms, fell as much as 60%.

According to SVB’s statement, the sale of securities will cause a $1.8 billion post-tax earnings loss, but the business also stated that its plan to reinvest the profits should be “immediately accretive” as the bank restructures its balance sheet.

Silicon Valley Bank (SVB) Chief Executive Officer (CEO) Greg Becker wrote in a letter to shareholders on Wednesday, “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses”.

Uday Kotak, a prominent banker, tweeted, “Overnight developments in US banking: markets, analysts, investors underestimate the importance of financial stability for the balance sheet of a bank. When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere”, through its official Twitter handle.

Recent Development In US Banking

According to recent developments in US banking, “Markets, analysts, and investors undervalue the significance of financial stability for a bank’s balance sheet”.

An exceptionally fickle base of depositors who withdrew money swiftly was the problem for the once-flying California lenders. But below it, a financial crack may be seen: Banks are now overloaded with low-interest bonds that can’t be sold fast without incurring losses due to rising interest rates. A vicious cycle could result if too many clients withdraw money from their deposits at once.

In fact, SVB’s chief executive officer asked consumers to remain calm amid deposit withdrawals.

According to analysts, the immediate risk for many banks may not be existential, but it could be painful. Instead of facing a major run on deposits, banks will be forced to compete harder for them by paying higher interest rates to savers. This would reduce what banks earn from lending, reducing earnings.

Small- and mid-sized banks may experience particular pressure, which would force them to sell more stock and dilute current investors because their funding is typically less diversified.

The Fed has raised its benchmark rate to more than 4.5% in the last year, the highest rate since 2007, in response to prices rising at the fastest rate in decades. In order to stabilize prices, the head of the US central bank has now warned that officials may raise interest rates further and faster than previously anticipated.

SVB works with nearly half of all venture capital-backed startups in the United States, as well as 44% of US venture-backed technology and healthcare companies that went public last year. These industries have been devastated as interest rate hikes to combat inflation have sunk valuations and forced companies to seek cash.

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