Silvergate served the cryptocurrency industry, while SVB was the bank for Silicon Valley tech startups.
It’s a black week for the US financial system: in just 48 hours, the banking sector has been rocked by the collapse of two major banks.
Most worryingly, these banks served two so-called growth economic sectors: the technology sector and the cryptocurrency industry.
svb Financial Group, (BLIMS) – Get a free reportthe lender to Silicon Valley startups went bankrupt on March 10, falling into the hands of the FDIC. The federal agency has taken control of the banking company, reviving the ghosts of the 2008 financial crisis.
“Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver,” the federal agency said in a news release.
“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an anticipated dividend within the next week. Uninsured depositors will receive a certificate receivership for the remaining amount of your uninsured funds.
It added that it can pay a dividend to uninsured depositors by selling SVB’s assets. (BLIMS) – Get a free report.
The FDIC is a guarantor for bank depositors.
SVB: the takeaway bank for tech startups
At the end of last year, SVB had $209 billion in total assets and $175 billion in total deposits. SVB becomes the second largest US bank failure after Washington Mutual in 2008.
SVB was a central player in the innovation economy. He was the backbone of the tech industry in Silicon Valley. He played an important role in the startup ecosystem by providing specialized financial services, industry expertise, a valuable network, and a strong reputation.
It also offered a range of financial services specifically tailored to the needs of start-ups, such as venture debt, corporate banking, and asset management. These services are designed to help start-ups manage their finances, optimize their cash flow, and scale their businesses.
SVB suffered from the Federal Reserve’s interest rate hike because it hurt the value of its investment assets, especially bonds. As a result, the bank had to resort to a capital increase as many startups withdrew their deposits from the bank because they were burning a large amount of cash.
SVB had to sell bonds, mainly US Treasuries, at a discount to cover these withdrawals. Rising interest rates have caused existing bonds to lose value. By selling these bond positions, SVB had to take a significant loss.
But his attempt to raise $2.25 billion failed.
Collapsed Silvergate Cryptobank
Two days earlier, Silvergate, the crypto bank, collapsed. The bank was where most of the big crypto companies went, because traditional banks didn’t want to do business with them. And that reluctance was due to warnings from regulators who consider the crypto industry a risky sector.
The company said on March 8 that it intended to “terminate operations and voluntarily liquidate the bank in an orderly manner and in accordance with applicable regulatory processes.”
It added: “In light of recent industry and regulatory developments, Silvergate believes that an orderly winding down of banking operations and a voluntary liquidation of the bank is the best way forward.”
“The bank’s winddown and liquidation plan includes a full refund of all deposits. The Company is also considering how best to resolve the claims and preserve the residual value of its assets, including its proprietary technology and tax assets.”
On the brink of a bigger slump than 2008: Economist Schiff
The La Jolla, California-based bank’s defeat came due to pressure from regulators, particularly the Justice Department, which has opened an investigation into its business dealings with the empire of former crypto king Sam Bankman-Fried.
Bankman-Fried has been indicted on 12 counts of fraud, stemming from the collapse of his crypto empire, cryptocurrency exchange FTX, and its sister company, Alameda Research.
Silvergate was established in 1988. Initially, the bank specialized in lending to industrial clients, and at that time also offered loans for residential and commercial real estate.
But in 2013, the bank began courting crypto companies, when traditional banks were reluctant to do so due to the opacity that prevailed in the sector. Silvergate thus became the crypto bank.
In 2019, the firm made its initial public offering, promising a complete refocus on the industry, which was experiencing a renaissance at the time. As of September 30, Silvergate had $11.9 billion in digital assets held as deposits.
But the bankruptcy of FTX and Alameda on November 11 scared off customers. Thus, the bank reported only $3.8 billion in digital assets held as deposits as of December 31. FTX was one of Silvergate’s big clients.
The question now is whether other US banks will fail. Could the problems at SVB and Silvergate spread to other regional banks, especially as suspicion may lead customers to run to these banks to withdraw their money?
“The US banking system is on the brink of a much bigger collapse than it was in 2008,” said economist Peter Schiff, known for his dire predictions.
“Banks hold long-term paper at extremely low interest rates. They cannot compete with short-term Treasuries. Massive withdrawals by depositors seeking higher yields will result in a wave of bank failures.”
