The current market chaos in US banking, tech, and cryptocurrency is hard to summarize without using the common moniker FUD (fear, uncertainty, and doubt) in a very literal sense.
After the pandemic, the Federal Reserve raised interest rates in an attempt to bring down inflation and unemployment numbers in the US. Regardless, inflation went up; interest rates continued to rise. This flew in the face of years of enjoying low-to-no interest rates, first introduced with the goal of ensuring a stable economy.
For what it’s worth, no banks failed from October 2020 until this year.
However, cryptocurrency markets tumbled when FTX was identified as a fraudulent actor in November. Its main banking partner, Silvergate, served most prominent crypto firms — but when it began to experience a credit and liquidity crunch, depositors exited en masse and loan markets dried up.
- Silvergate decided to settle its outstanding advances and shortsellers piled into the stock.
- Its main business — the Silvergate Exchange Network — was shuttered.
- The crypto-friendly bank moved to voluntarily liquidate on March 9.
Crypto market chaos as FDIC takes over SVB and Signature
Silicon Valley Bank (SVB) became the first bank failure in the past two-and-a-half years on March 10. To put it simply, the bank had a mismatched bond portfolio due to rising interest rates, and an extremely specific risk management structure due to its venture capitalist clientele.
On Thursday, with the stock of SVB collapsing, its chief exec pleaded with depositors to stem the tide of withdrawals, stating: “If everybody is telling each other that SVB is in trouble then that will be a challenge.” A bank run basically began the very next second.
The stock was scheduled to open at $37 on Friday, but trading was halted and the Federal Deposit Insurance Corporation (FDIC) took over the bank. By end of day, SVB no longer existed — its name was changed by the FDIC to the Deposit Insurance National Bank of Santa Clara.
In what could be described as half concern trolling and half manic meltdowns, public-facing venture capitalists spent the weekend making dire predictions of ‘the collapse of Western Civilization.’
They demanded that the FDIC — which traditionally only promises to insure deposits of up to $250,000 — insure every deposit at SVB. With rich capitalists threatening widespread regional bank runs, a very real systemic risk began to develop.
The second bank collapse occurred on March 12: Signature Bank in New York. Just like Silvergate, Signature was a large provider of banking for cryptocurrency companies. Instead of the FDIC moving in to takeover the bank, a statement was issued jointly with the Fed and Treasury, ensuring all deposits at SVB and at Signature Bank would be covered.
Seemingly, a widespread regional bank run had been avoided.
Several other banks appear to be suffering from degrees of pressure — from local California banks catering to clients like those at SVB, to dozens centered on cryptocurrency clients. The odds aren’t exactly small that we’ll avoid more bank failures or liquidations.
But the Federal Reserve is having a closed door meeting today and, in the meantime, all depositors’ cash at banks in crisis are insured.
Will the contagion spread? Will crypto-friendly banks be shuttered or allowed to continue? How many banks will fail in 2023? And will FDIC insurance be changed forever? We should know many answers by the end of the week.
Edit 18:00 UTC, Mar 20: Updated to remove reference to FHLBank San Francisco recalling advances from Silvergate Bank. FHLBank states that Silvergate prepaid its outstanding advances based on its own assessment of its position.