The banking crisis and subsequent collapse of Silicon Valley Bank presents a compelling case study that deserves analysis. Antonio Velardo tells us how SVB, one of the main lenders of venture capital funds and emerging technology companies, sank.
The problem of diversification
The bankruptcy of Silicon Valley Bank was partly due to the lack of diversification of its investments. Much of its deposits were in long-term U.S. Treasury bonds and agency-backed mortgage securities, which became a problem when interest rates rose. Additionally, when the economic crisis hit the technology sector, many clients withdrew their money and the bank was unable to cover its obligations due to a lack of cash, declaring bankruptcy just 48 hours later.
The bankruptcy of Silicon Valley Bank, says Antonio Velardo, was exacerbated by a bank run triggered in part by social media, which sowed panic over the bank’s lack of funds. After the announcement of a capital raise, SVB’s stock plummeted 60% on March 7. The next day, California regulators closed the bank and placed it under the FDIC’s supervision. Major technology companies such as Roku and Etsy had significant amounts of cash in SVB accounts, but the accounts were only insured up to $250,000.
Impact of the banking crisis on the technology sector
The technology sector has been greatly affected, as large technology companies have cut jobs and start-ups may have funding issues. “Markets are predicting a 37% probability of a 75 basis point cut in the Fed funds rate for the last meeting of this year,” clarifies Antonio Velardo.
Market outlook and sector allocation
“As a macroeconomic and equity analyst, I have observed that financing is becoming increasingly selective, and the companies that are at the greatest risk are those that are overly leveraged and have used leverage to acquire overvalued assets,” notes Antonio Velardo. These companies lack the ability to manage expensive debt and do not have the asset value to meet their debt service.
Finally, Antonio Velardo says that central banks are in a difficult position as they try to balance financial stability and inflation, which offers opportunities to investors. Additionally, for policymakers, this task poses a difficult challenge to overcome. “We must ask ourselves if a soft landing is still possible or if difficult decisions will be necessary.”