SVB Financial Crisis Sparks Investor Concerns About Other Banks

Investors and analysts are examining other banks for potential problems following the collapse of SVB Financial, the holding company for Silicon Valley Bank. The bank’s troubles, which have resulted in a takeover by the Federal Deposit Insurance Corp, have sent shockwaves through the industry. SVB is a key lender to venture-capital firms and the start-ups they fund. When a wave of cash entered the bank during the Covid-19 pandemic, the firm invested in long-term Treasury bonds. However, the value of these bonds fell when interest rates increased, leading to losses.

The situation worsened as deposits began fleeing the bank faster than expected. In an effort to stem the tide, SVB sold some of its securities at a loss, triggering a rout that resulted in trading in its shares being halted by Nasdaq. Some venture-capital investors advised start-ups to pull cash from the bank, adding to fears of a bank run.

Banks judged to have committed to potentially risky businesses have been hit hardest by investors. Shares of PacWest Bancorp and First Republic Bank have fallen by 54% and 29% respectively over the past two days. More than two-thirds of PacWest’s lending portfolio is tied to real estate, with a significant proportion lent to venture-capital firms. First Republic extended its loans in recent years to expand its interest income, primarily through the mortgage-lending business. However, investors fear that real estate and mortgage lending will fare poorly in the coming months as the impact of Federal Reserve interest-rate increases works through the economy.

First Republic has sought to reassure investors, stating in a filing on Friday that its mix of deposits is well diversified and its investment portfolio is high quality. However, the wider industry is facing a period of intense scrutiny as investors and analysts seek to identify any other potential problem areas.