Bank of America and Wells Fargo both fell 6.2 percent. (File)
New york:
The four largest US banks saw their share prices lose a combined $52 billion on Thursday as the financial sector reported problems at SVB Financial, a major lender focused on Silicon Valley.
Shares in SVB Financial plunged 60 percent on Thursday and continued to slide in after-hours trading after it announced it had lost $1.8 billion in a sale of securities to raise funds.
The massive decline hit the financial sector, with JPMorgan Chase, the largest US bank, down 5.4 percent on the day.
Bank of America and Wells Fargo both fell 6.2 percent, while Citigroup fell 4.1 percent.
According to CFRA Research analyst Alexander Yocum, SVB’s problems may be due to its involvement in venture capital and private equity.
As interest rates have risen, “those industries have really struggled,” Yocum said. Their increased cash withdrawals subsequently forced SBV to seek more liquidity.
Wells Fargo’s Mike Mayo echoed that sentiment, saying the main problem at SVB was a “lack of funding diversification,” with most deposits coming from venture capital.
The situation at the Silicon Valley-based firm is not entirely representative of the banking industry, but the struggle “will affect sentiment,” he added.
S&P downgraded the company’s debt rating by one notch, saying SVB could borrow more money.
SVB’s announcement comes on top of an announcement the same day that crypto-banking titan Silvergate plans to shut down amid the turmoil in the cryptocurrency market.
Although the two events are unrelated, “suddenly everyone was wondering… ‘what do all the other banks look like?’ Yocum said.
He noted that in the case of high interest rates, “the bond portfolio will go down.”
The US Federal Deposit Insurance Corporation (FDIC) also warned of high interest rates threatening banks’ portfolios, saying in a recent report that “the long-term assets that banks bought when interest rates were low are now worth less than their face value.”
At the end of 2022, banks’ unrealized losses on these securities totaled about $620 billion, the FDIC said.
Banks usually wait for the bonds to mature without losing money in the process.
“But if there’s a run on deposits,” Yocum said, banks “will be forced to sell securities and take huge losses.”
It “probably won’t happen” at many banks, he added.
However, some banks are “starting to see an outflow of deposits,” Yocum said, “as people move their deposits to higher-yielding places.”
(Except for the headline, this story was not edited by NDTV staff and was published on a syndicated channel.)
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