Key Takeaways:
- SVB Financial is seeking to raise $2 billion after facing significant losses on bonds it sold, leading to a run on the bank and a 60% drop in its stock.
- The bank has struggled to earn money due to a slowdown in venture capital deposits and rising losses in its investment portfolios.
- To patch the financial hole, SVB sold government bonds at a loss of $1.8 billion and is raising money by selling new shares as part of a plan to reach $2 billion in capital.
- The SVB crisis could potentially force the Federal Reserve to pause or even lower interest rates to prevent the spread of the bank's issues to other banks and impact mortgage rates.
- Investors and homeowners should keep an eye on developments and be prepared for potential changes in interest rates and mortgage rates
SVB's $2 billion Capital Raising Plan
SVB Financial, the parent company of Silicon Valley Bank, recently announced that it was seeking to raise over $2 billion in capital after facing big losses on a batch of bonds it sold. The news spooked investors and depositors, leading to a run on the bank and causing its stock to collapse by 60% on Thursday.
SVB's Struggles with Increasing Interest Rates
The story of Silicon Valley Bank is a prime example of how the surge in interest rates over the last year has disrupted once high-flying investors, financial institutions, and companies that thrived in a world of low-interest rates. Banks borrow short-term, cheap money, typically deposits, and invest that money at higher rates, often by making longer-term loans or buying safe government bonds. The difference between the interest it pays to borrow and the interest it receives when it lends or invests is what generates the bank's profits.
The Impact of the Venture Capital Slowdown on SVB
SVB has been finding it harder to earn money over the last year because a key source of cheap deposits, the venture capital boom, has slowed down, just as losses in its investment portfolios have risen. Many of SVB's depositors are venture capital-funded tech companies. When tech stocks and start-up valuations were soaring in 2021, seemingly endless rounds of venture capital rolled in to prop up unprofitable tech startups, and SVB's cheap deposit base swelled. However, the brutal sell-off in tech stocks and downturn in startup valuation has slowed the flow of venture capital. That means money-losing tech companies are rapidly burning through the cash that previously sat as deposits at SVB, with few fresh investor checks rolling in to help them out and puff up SVB's deposit base. Simultaneously, rising rates have driven down the value of loans and bonds that the bank holds in its portfolio.
To patch the hole in its finances, SVB sold a $21 billion slug of government bonds at a loss of $1.8 billion. The bank also moved to raise money by selling new shares as part of a plan to come up with $2 billion in capital. It also slashed its profit outlook for the entire year.
Silicone Valley Bank Customers lining up in an attempt to recover their savings.
The Technology-Focused Lender's Vulnerability
The situation at SVB is particularly concerning because it is a technology-focused lender and has strong ties to the tech industry. The bank's depositors are primarily technology companies and venture capitalists, making it vulnerable to any disruptions in the tech industry.
The Federal Reserve's Interest Rate Hike and its Effect on Financial Institutions
The Federal Reserve's interest rate-hiking campaign, the steepest since the early 1980s, has changed the game for financial institutions. Higher interest rates increase the cost of borrowing and reduce the amount of money that companies can borrow. That, in turn, affects the amount of money that banks can make from lending.
Potential Implications for Mortgage Rates
So, what does this mean for mortgage rates? Well, the SVB situation can potentially force the Federal Reserve to pause interest rate increases, or even lower rates, in order to prevent the spread of the bank's issues to other banks. If other banks become fearful of potential runs, they may also start selling bonds at a loss, causing bond yields to drop further and mortgage rates to follow suit.
The Uncertainty Ahead: Preparing for Changes in Interest Rates and Mortgage Rates
However, it's important to note that the Federal Reserve's decision to pause or lower interest rates is not guaranteed. The central bank is closely monitoring the situation, but will also consider other economic factors such as inflation, employment, and GDP growth when making decisions about interest rates.
Overall, the SVB crisis is a reminder of how interconnected the financial system is and how one institution's problems can potentially impact the wider economy. While the full extent of the fallout from the SVB situation remains to be seen, it's important for investors and homeowners to keep an eye on developments and be prepared for potential changes in interest rates and mortgage rates.
