Lorraine discusses the recent failures of the US banks Silvergate bank, Silicon Valley bank (SVB), and Signature Bank, and what caused them⎯macro conditions, a US Fed policy that has had unintended negative effects, poor risk management, and panic. She also explains how this crisis, which was not fueled by crypto, has affected crypto businesses and stable coins.
Episode Highlights
Three US banks, Silvergate Bank, Signature Bank, and Silicon Valley Bank, failed days apart. Although all banks were crypto friendly, crypto was not to blame for their collapse. Bank runs, dwindling deposits, and losses sustained following the sale of long-date government bonds contributed significantly to their failure.
Other banks serving disparate customers have experienced similar headwinds. The number of banks willing to serve crypto banks has reduced.USDC and other stable coins lost their $1 peg following the collapse of SVB but have since recovered.
Additional reading
Collapse of SVB, Signature, and Silvergate
Stable coins depeg
Crypto-specific news websites
What a couple of weeks it’s been!
On March 9th, Silvergate bank, announced that it would wind down operations. Four days later, Silicon Valley bank, SVB, failed suddenly. Two days later Signature Bank was shut down.
The failure of these US banks raised questions about the health of other small regional US banks, and resulted in the creation of a program that would hopefully and will hopefully ensure that banks facing the same headwinds that felled SVB remain standing.
What does this have to do with crypto, did crypto cause this, and what does it mean for cryptospace in the US and around the world?
SVB primarily served clients in the technology, life science, healthcare, and venture capital sectors in the US and around the world. It also served startups in the cryptospace, although these were a small percentage of its customer base. Last week, SVB experienced the classic run on the bank, a flight of deposits due to loss in confidence in the bank.
Like most banks, SVB practiced fractional reserve banking, where banks keep only a fraction of their total deposits as cash reserves and lend out or invest the rest. The fraction of the deposits kept in reserve is determined by the reserve requirements set by the central bank of a country, that would be the US Fed in the US and the Bank of Uganda in Uganda. Since June 2022, the cash reserve requirement for banks operating in Uganda has been 10%.
SVB invested the bulk of its customer’s deposits in long-dated government bonds, primarily, 10-year bonds. As interest rates increase, these long-dated bonds lose market value.
When the Fed, the US Central Bank, decided to increase interest rates to fight inflation, SVB's investment portfolio, lost value. It decided to sell some of its long-dated bonds at a loss and announced it would be issuing new shares to cover the shortfall. Unfortunately, these sequence of events had the unintended effect of leading to a run on the bank. This run and its inability of SVB to raise additional capital or find a buyer led to its failure.
Now Signature Bank served clients in the real estate and legal sectors, as well as some clients in the crypto space, who accounted for only 25% of its deposits. It is not yet clear why Signature was shut down. Although it experienced a run on the bank on Friday, last week, it was not in the same dire straits that SVB had found itself in.
Now, Silvergate was one of the leading providers of financial services to crypto companies. It’s problems stemmed from dwindling deposits due to the crypto winter, its association with FTX and Alameda research, and having to sell its investment portfolio, like SVB did, to meet withdrawal requests and shore up its balance sheet. It was then struck by other headwinds that resulted in it voluntarily deciding to wind down operations.
There were other small regional banks in America serving disparate customers that found themselves in a situation similar to SVB’s, who had similar investment portfolios, who if they had experienced a run on the bank, would have failed. The US banking sector seems to be in crisis. Crypto did not cause this crisis. Many factors are at play here: a Fed policy that seems to be having negative unintended effects, poor risk management, lack of diversification of investment portfolios, panic. Crypto did not cause thee things but it has been affected by what has happened in traditional finance.
How has crypto been affected? That’s what I will touch on next.
In the last quarter of 2022, Circle, the company that issues USDC, the second largest stable coin counted six banks among its banking partners; half of those banks have failed. Like Circle, several crypto businesses are going to have to find alternative banking partners at a time when banks in the US are being advised to limit their exposure to crypto. There are banks willing to work with crypto businesses, but the reality is that their numbers have dwindled. Overseas banks could also be an option. According to Reuters report, banks in Switzerland are seeing an influx of interest from American crypto since the collapse of SVB and Signature.
There has been talk of contagion in the crypto space destabilizing the traditional financial system, which is a valid concern that requires putting in place thoughtful guard rails policies and frameworks that protect one sector without stifling another. What came out of this past week is that contagion can spread from either direction. We learned, for example, that stable coins are not that stable, and their prices can be temporarily but significantly affected by considerable headwinds originating in the traditional finance, which does not bode well for crypto assets whose price should remain quite stable. Following the failure of SVB, when it seemed that more banks would fall, and after the disclosure that some of the reserves backing USDC were held at SVB, many stable coins lost their peg to the US dollar. Despite attempts by Circle to reassure the market, USDC plunged as low as $0.82 on decentralized exchanges, although it and other stable coins with no exposure to the failed banks have since recovered. I’ll touch on this some more in the next episode!
That’s all I have for you this week. A crisis seems to be afoot in the US banking sector and that has ramifications for the cryptospace, but if you have anything you’d like to say about anything I have shared today, feel free to reach out on Twitter @decen_podcats. Until next time, take care of yourselves.