An overnight sell-off of US banking stocks, prompted by troubles at the tech-focused lender Silicon Valley Bank (SVB), has seeped into European markets and sent the FTSE 100 down almost 2% on Friday.
Investors were spooked by news that California-based SVB, which primarily lends to tech startups, had launched an emergency share sale to shore up cash after revealing it had lost $1.8bn (£1.5bn) when it sold a portfolio of bonds in response to a decline in customer deposits.
SVB’s US-listed shares plunged 60% on Thursday but the rout also spread to other Wall Street stocks. Its shares were halted on Friday after tumbling 66% in premarket trading, as CNBC reported that the SVB was in talks to sell itself after failing to raise enough capital.SVB declined to comment.
The subsequent plunge in banking sector share prices was prompted by investors worried about the wider impact that recent increases in interest rates would have on the value of other banks’ portfolios of bonds, which tend to fall in price when interest rates rise. There were concerns about how that could affect lenders’ capital levels, which are meant to offset riskier parts of banks’ balance sheets.
The jitters weighed on US bank shares, which fell further Friday. JP Morgan was down 1.5% at the start of trading in New York, while Wells Fargo dropped 2.4%, Goldman Sachs fell 3.4% and Bank of America tumbled 4.3%.
Concerns also seeped into European markets, including London’s FTSE 100, which was dragged down by some of the biggest UK-listed lenders, including Barclays, which fell 6%, as well as NatWest, Lloyds Banking Group and Standard Chartered, which were all down about 4%.
However, John Cronin, a financial analyst at the stockbroker Goodbody, said the sell-off in UK bank stocks was unwarranted, given that deposits at most big banks come from the retail market rather than tech startups, and that those same lenders would have to unwind the “enormous” cash balances held by the Bank of England before selling off any of their investment portfolios. Furthermore, UK lenders also hedge risks linked to those portfolios.
“We don’t believe there is any readacross to the Irish and UK banks,” Cronin said, adding that the “likelihood of forced liquidation of investment securities portfolios in response to deposit flight for Irish and UK banks is pretty much zero”.
However, it has not stopped investors from speculating over the size of unrealised losses across the global banking sector.
“In a heavily interconnected banking industry it’s not so easy to compartmentalise these sorts of events, which often hint at vulnerabilities in the wider system,” the AJ Bell investment director, Russ Mould, said. “The fact SVB’s share placing has been accompanied by a fire sale of its bond portfolio raises concerns.
“Lots of banks hold large portfolios of bonds, and rising interest rates make these less valuable – the SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income holdings.”
While SVB has reportedly hired advisers to find a buyer for the business, after failing to raise enough capital, the billionaire investor and hedge fund manager Bill Ackman has even suggested that the US government consider stepping in with a potential bailout that would protect SVB’s customers and avoid a wider crisis in the financial system and tech sector if the calamity continues.