Banks tumble as SVB ignites capitalization fears

March 9 (Reuters) - The S&P 500 bank index (.SPXBK) tumbled nearly 6% on Thursday in its biggest one-day drop in over two years as investors fled the industry following SVB Financial Group's (SIVB.O) share sale announcement and crypto bank Silvergate's decision to wind down operations.

Shares of SVB, whose operating segments include Silicon Valley Bank, slumped over 50% in their deepest one-day drop on record after the company announced a $1.75 billion share sale late on Wednesday. SVB is battling cash burn due to declining deposits from startups struggling with a venture capital funding drought.

San Francisco headquartered First Republic (FRC.N) slumped 15% after hitting its lowest level since October 2020.

The SPDR S&P regional banking ETF (KRE.P) dropped more than 7% to its lowest level since January 2021.

Major U.S. banks were also hit, with JPMorgan (JPM.N) and Bank of America (BAC.N) both down more than 5%.

First Republic and SVB were the S&P 500's deepest percentage decliners in Thursday's trading session, while JPMorgan's loss weighed more than any other stock on the S&P 500's 1.1% decline at mid-day.

"The Silicon Valley raise got everybody nervous about people's capital levels and what deposits are doing. A lot of institutional investors don't feel great about owning certain banks right now," said R.J. Grant, head of trading at Keefe, Bruyette & Woods in New York.

"It just gets people freaked out because Silicon Valley, historically has been a very strong, well-run bank. If they're having issues right now, people are wondering what about other banks that are lesser quality and that don't have the reputation that Silicon Valley Bank has."

Investors were also grappling with the decline of cryptocurrency-focused lender Silvergate Capital (SI.N), which dropped 22% after saying late on Thursday it planned to wind down operations and voluntarily liquidate after it was hit with losses following the collapse of crypto exchange FTX.

Shares in Silvergate peer Signature bank (SBNY.O) fell 9.4%.

Reporting By Sinéad Carew and Lance Tupper; additional reporting by Noel Randewich in Oakland, Calif. Editing by Andrew Heavens and Nick Zieminski

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