Silicon Valley Bank (SVB) is facing a proposed class action lawsuit filed in the federal court in San Jose, California, by shareholders who accuse the company, Chief Executive Officer Greg Becker, and Chief Financial Officer Daniel Beck of fraud.
The lawsuit alleges that SVB failed to disclose how rising interest rates would undermine its business model and make it “particularly susceptible” to a bank run. It seeks unspecified damages for SVB investors between June 16, 2021, and March 10, 2023.
SVB’s demise sparks contagion fears
Silicon Valley Bank had an estimated $209 billion of assets and $175.4 billion of deposits before its collapse, making it the largest US bank failure since the 2008 financial crisis.
Its collapse has sparked fears of contagion among other lenders that also cater to wealthy clients, including technology start-ups and venture capital-backed companies, as well as large regional banks.
The bank had surprised the market by disclosing a $1.8 billion after-tax loss from investment sales, and that it planned to raise capital as it scrambled to meet redemption requests.
Regulators in the UK, the US, and Asia acted quickly to try to contain any fallout from the bank’s demise. The Bank of Japan provided further help to keep financial markets stable after its leading stock index fell 2.1%.
However, fears continue that other banks may be vulnerable while the path for interest rates now appears uncertain. In Japan, major lenders such as the country’s largest bank, MUFG, saw their share prices tumble by more than 8% on Tuesday. The European Stoxx banking index was down 0.75% on Tuesday morning.
The collapse of Silicon Valley Bank has also resulted in New York-based Signature Bank, which focuses on the cryptocurrency industry, collapsing at the weekend.
Meanwhile, HSBC rescued SVB’s UK business for £1. A key issue for SVB is that it invested billions of dollars in government bonds at a time when interest rates were far lower.
Since then, central banks have been raising interest rates to help calm rising prices, resulting in banks such as SVB sitting on huge losses. Last week, SVB reported a $1.8 billion loss after selling a big chunk of bonds.
Federal Reserve may intervene
The Federal Reserve may intervene to quell turmoil in the banking sector, curbing an interest rate rise next week. The collapse of Silicon Valley Bank and its potential ripple effects continue to worry regulators and investors alike.
The SVB executives’ lawsuit and the fallout from the bank’s collapse are likely to be in the news for some time to come.
The collapse of Silicon Valley Bank and the lawsuits that are expected to follow have raised concerns about contagion and highlighted the risks of investing in banks that cater to wealthy clients.
Regulators are taking steps to contain any fallout, but the path for interest rates and the potential ripple effects of the bank’s collapse continue to worry investors and regulators alike.
The Federal Reserve’s actions next week may have significant implications for the banking sector and the wider economy.
