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. SVB’s own shares were down as much as 66% in late pre-market trading on Friday.
The plunge in banking sector share prices was prompted by investors worried about the wider impact that the recent increase 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 sent the shares of Wells Fargo and Bank of America down 6.2% overnight, while JP Morgan dropped 5.4% and Citigroup fell 4%.
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%.
“An earthquake in Silicon Valley led to aftershock on Wall Street and the tremors could still be felt in London on Friday morning,” the AJ Bell investment director, Russ Mould, said.
“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 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.”
US banking stocks could be in for further pain when Wall Street opens for trading on Friday.
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.
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The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall. That is why gov’t intervention should be considered.
— Bill Ackman (@BillAckman) March 10, 2023
The fear is that if SVB collapsed, it could put the deposits of tech startups at risk, and subsequently affect the returns of venture capital investors who back them and affect what some believe is a long-term driver of economic growth.
“The risk of failure and deposit losses here is that the next, least well-capitalised bank faces a run and fails and the dominoes continue to fall. That is why [government] intervention should be considered,” Ackman said in a tweet.
