Was the Moody’s downgrade the reason Silicon Valley Bank failed?

News of the collapse of Silicon Valley Bank and the exposure of USDC issuer Circle to the tech lender has reverberated across the stock and cryptocurrency markets. However, will Moody’s downgrade of SVB accelerate the bank’s collapse?

Moody’s rating on SVB

Moody’s Investors Service lowered the credit rating of SVB Financial Group and its subsidiary Silicon Valley Bank. The call came after bonds tied to SVB’s funds fell sharply in value due to higher interest rates. Moody’s then downgraded SVB’s long-term local currency bank deposit rating to Caa2 from A1 and its issuer rating to C from Baa1.

Earlier, Standard & Poor’s (S&P) Global downgraded the credit ratings of SVB Financial Group and Silicon Valley Bank to junk status, further predicting that the bank may declare bankruptcy.

SVB responded to the prospect of a downgrade by selling more than $20 billion worth of low-yield bonds to boost the value of its holdings before news of the downgrade became public. This shortens the time frame considerably as they need to do the preparatory work required to sign non-disclosure agreements with investors committing to a deal of this size.

Its lawyers advised the banks that investors need at least 24 hours to digest the new financial projections and complete the sale, and unfortunately, most investors need more time to meet the stipulated deadlines.

The plan is to take the proceeds from the sale and reinvest them in higher-returning assets. However, their plan backfired.

Since the majority of SVB’s clients are in the technology sector, especially the recently recovering cryptocurrency industry, the impact of a potential collapse similar to FTX or 3AC’s is significant.

Bitcoin Price March 12 | Source: BTCUSDT on Binance, TradingViewBitcoin Price March 12 | Source: BTCUSDT on Binance, TradingView

With the looming risk of bankruptcy, some investors and customers are withdrawing their deposits and looking for other banking options, which could lead to further instability in the SVB financial system.

Silicon Valley Bank tries to soften the blow

With the original plan falling through, SVB struck a deal with private equity firm General Atlantic, which agreed to buy $500 million of the $2.25 billion stock sale. As of Wednesday, SVB sold its bond portfolio at a loss of $1.8 billion. Moody’s downgraded the bank by just one notch as SVB sells its bond portfolio and plans to raise capital.

Shares of SVB had plummeted 60% by Thursday. Venture capital firms then began advising startups to withdraw funds from banks.

General Atlantic and other investors fled, and stock sales collapsed. California banking regulators shut down the bank on Friday and designated the Federal Deposit Insurance Corporation (FDIC) as supersede, triggering a drop in prices of cryptocurrencies including bitcoin.

Information source: compiled from NEWSBTC by 0x information.Copyright belongs to the author, without permission, may not be reproduced

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