Started by Bitcoin, Mar 13, 2023, 08:33 am
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The collapse of Silicon Valley Bank and news that Circle, the issuer of USDC, was exposed to the tech lender has caused reverberations across the stock and crypto markets. However, could Moody’s rating downgrade of SVB have accelerated the bank crash?
Moody’s Investors Service downgraded the credit ratings of SVB Financial Group and its subsidiary, Silicon Valley Bank. The call came after the value of bonds where SVB had their money tied drastically fell due to the higher interest rates. Subsequently, Moody’s lowered Silicon Valley Bank’s long-term local currency bank deposit ratings to Caa2 from A1 and its issuer ratings to C from Baa1.
This news came after Standard and Poors (S&P) Global downgraded SVB Financial Group and Silicon Valley Bank’s credit ratings to junk status, further predicting that the bank would likely declare bankruptcy.
SVB’s response to the downgrade prospect was to sell more than $20 billion worth of low-yielding bonds, to improve the value of their holdings before knowledge of their downgrade was made public. This severely reduced the timeframe since they needed to do the preparatory work needed to sign confidentiality agreements with investors required to commit to a deal of such a size.
Its lawyers advised the bank that investors need at least 24 hours to digest the new financial projections and complete the sale, and unfortunately, most of the investors needed more time to meet the required deadline.
The plan was to take the proceeds from the sale and reinvest them in assets that delivered higher returns. However, their plan backfired.
Since most of SVB’s clients are within the technology sector, particularly the recently recovering crypto industry, the implication of a potential crash similar to FTX or Three Arrows Capital (3AC) was significant.
With the risk of bankruptcy looming, some investors and clients began withdrawing their deposits and looking for alternative banking options, potentially leading to further instability in SVB’s financial system.
With the initial plan falling through, SVB lined up private equity firm General Atlantic, which agreed to buy $500 million of the $2.25 billion stock sale. By Wednesday, SVB had sold the bond portfolio for a $1.8 billion loss. Moody’s downgraded the bank only by a notch because of SVB’s bond portfolio sale and plan to raise capital.
By Thursday, SVB’s stock plunged by 60%. Venture capital firms then began advising startup companies to withdraw funds from the bank.
General Atlantic and other investors walked away, and the stock sale collapsed completely. California banking regulators closed the bank on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, triggering a drop in crypto prices, including Bitcoin.
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