Biotech rocked by run on Silicon Valley Bank
The recent turmoil surrounding niche bank Silicon Valley Bank has led to major falls in stock markets around the world. The turmoil has mainly affected the banking sector, but it has also left its mark on biotech companies. The question everyone is now asking is, how far will the ripple effects extend?
Uncertainty in the banking sector was triggered by Silicon Valley Bank (SVB), which finds itself in a liquidity crisis. The stock plummeted on Thursday last week, after the bank announced heavy losses in connection with a sale of a securities portfolio valued at 21 USD billion.
SVB was one of the banks that during the pandemic brought in both new customers and investors during the pandemic technology boom. The bank placed a large percentage of customers’ deposits in long-term bonds. This became a problem when customers in the technology and biotech industries needed to withdraw their deposited funds again.
The recent rise in interest rates caused SVB’s bond portfolio to decline in value to the point that the bank did not have enough cash to meet customers’ withdrawal needs. SVB was forced to sell with huge losses, but the sales were still not enough.
Panic after failed capital raise
The bank attempted to salvage the situation by bringing in new capital. When it failed, panic quickly spread. Customers rushed to the bank to try to withdraw their money. According to the Wall Street Journal, on Thursday customers made attempts to withdraw a staggering 42 billion USD.
The stock plummeted and trading stalled. On Friday, the Federal Deposit Insurance Corporation (FDIC), stepped in and shut down banking operations.
SVB is the 16th largest bank in the United States, with assets of approximately 209 billion USD and deposits of 175 billion USD. Nearly half of all US venture capital-funded technology and life science companies are customers in the bank. The collapse is the second largest in the banking sector since Washington Mutual Bank perished in connection with the 2008 financial crisis.
Shockwaves reach the life science sector
Fierce Biotech reports that the fall of SVB has sent shockwaves through the US biotech industry. Several of the leading venture capital firms have confirmed to the online newspaper that they advised their portfolio companies to take their money out of the bank and instead deposit the funds in other banks.
SVB also has several international clients, and news about the companies’ exposure came out at the beginning of the week. Danish Zealand Pharma announced that almost 163 million DKK, or 15 per cent of the company’s cash and cash equivalents, were deposited in SVB.
Damage limitation
Over the weekend, President Joe Biden stated that he would do whatever it took to secure US bank customers’ deposits.
The situation is worse for investors who owned SVB shares. One of them is the Swedish pension administrator Alecta. Over the weekend, Alecta announced that it had invested approximately 9 billion SEK in SVB shares – capital that is now expected to be used up. Despite the significant loss, the pension company is able to meet its obligations to its customers, according to information published on Monday.
Pressure on the stock market
Although clients’ funds are secured, the concern has spread to the entire banking sector. Signature Bank, another niche bank focused on cryptocurrency, became the second victim of the crisis when it was shut down by the FDIC shortly after SVB on Sunday.
Several US regional banks plummeted when the stock market opened on Monday. One example was First Republic, which fell by as much as 62 per cent and with that wiped out a market capitalisation of just over 9 billion USD. The shares of the larger financial houses fared slightly better, with drops between two and seven per cent.
The turbulence also spread to Stockholm. The Swedish banking index OMX Stockholm Banks PI lost about 3.5 per cent on Monday. It remains to be seen what effect the banking crisis will have on the financing climate in life science.