Bank collapse

3 Banks close in five days

Silvergate March 8
Silicon Valley bank march 10
Signature bank March 12

Biggest reason – Crypto deposits and bank runs

The banks provided bank services for crypto customers.

Stable coin – USDCoin fell to 0.88 on 10 March but bounced back since then to par level when news of rescue came.

Silvergate

Was a Crypto bank associated with FTX ,another failed crypto broker whose customers lost billions.FTX held around $1billion in Silvergate when it collapsed and lost around $9 Billion dollars of its clients funds.In the 4th quarter of 2022 alone, Silvergate’s depositors withdrew more than $8 billion in digital deposits from the bank after FTX collapse ,causing the bank to sell its assets at a loss just to recover.But this year the bank went into liquidation due due to high borrowing rates, mounting crypto losses and customer withdrawals.

After the bank run withdrawals the bank had to borrow $4.3 Billion from the Home Bank Loan System , a fed organisation that assists with short term liquidity in times of need. This caused anger at Capitol Hill as lawmakers argued that if Silverback failed FDIC would get stuck with repaying back those loans. This put extra pressure on the bank as they were forced to sell securities and realise losses on them.

Q3 balance sheet report showed that the bank had around $12 billion worth of bonds with unrealised losses due to the increased interest rates, if the bonds were held to maturity the losses would not be realised as the bonds would be exercised at face value.After being forced to repay the loans back to Home Loan System , the bank realised around $880 million from selling securities and its deposits fell from $11.9 Billion in Q3 to $3.8 Billion in Q4.The bank posted a net loss for 2022 of around $950 million.One good thing is that after liquidation all Silvergates depositors will get their money back.

Silicon Valley Bank

It failed due to their realisation of market to maturity losses, which amount to billions and their portfolio which was largely concentrated around tech startups around Silicon Valley. The bank had around $200 billion in assets.

After the interest rate rises , many startups started feeling the cash crunch so they started withdrawing billions of dollars of their deposits at SVB. To raise capital SVB sold its government treasuries worth around $21billion with 1.79% coupon, but the current rate was 3.9% and realised a $1.8billion loss.It then tried to raise $2.25 billion in capital by issuing new shares but there were rumours of the banks failure so the share price dived 60% straight after.But that deal collapsed as many spooked investors started withdrawing their money from the bank. Then FDIC placed the bank into receivership to protect investors.

FDIC has guaranteed clients deposits to the tune of $250 000 for each clients account to divert Armageddon. The main issue was the fall in the value of the US government bonds which the bank invested in .

Current FED interest rate is 4.75% .

The biggest problem with SVB is that it hasn’t hedged its books to properly de-risk any losses that arise from rising interest rates. It could have easily hedged its bets with options and derivatives that gain from rising interest rates. FDIC after saving the depositors funds to a limit of $250,000 has taken over SVB and Signature Bank.

To assist the FED has now opened unlimited lines of credit to the banks to boost short term liquidity for the next year .They are able to lend out money as long as it matches their assets of safe government bonds.What the means is that banks can access depositors cash without having to sell the government bonds on its books who’s value has fallen ,so they don’t realise their massive losses.

To make matters worse for SVB not only did customers pull billions out of their deposits before the banking regulator had to step in to save it, but the company board gave Itself last minute millions of dollars worth of bonuses and days before exercising their options.

On 18th of March SVB filed for bankruptcy protection citing that it has only $2.2 billion in liquidity

Signature Bank

Once held $100 billion in assets but now has been taken over by a local New York community bank Bancorp.The bank collapsed after depositors withdrew billions of dollars of deposits in a span of a few days.Signature Bridge Bank NA assets were purchased by New York Community Bank.They acquired around $38 billion in assets and $13 billion in loans whilst around $60 billion remain in receivership by FDIC.The Bridge Bank was created by FDIC so depositors can still use their credit cards and assets.

Others

The other 2 banks which are in crisis right now is the American First Republic which just got Rescued by American biggest banks with a deposit of $30 billion to stave off global contagion. The other bank in trouble Credit Suisse has just gotten a loan from the Swiss National Bank of $57 billion to assist the bank with liquidity and stop any contagion spreading in the system.Another idea was to consolidate UBS and Credit Suisse, but that would provide too much risk and would monopolise the banking services in Switzerland.The best plan for CS is to create a spin off for some of its riskier assets and float it in an IPO whilst the safer assets like the local community banking could be merged with another local community bank.

References

US banks launch $30bn rescue of First Republic to stem spiraling crisis | Banking | The Guardian

Crypto Bank Silvergate Says It Will Shut Down

What is Silicon Valley Bank? The bank’s collapse, explained. – Vox

Silicon Valley Bank employees received bonuses hours before takeover

Silvergate Bank Extends Downward Spiral After U.S. Criticism Spurs Losses

Crypto-friendly bank Silvergate to wind down after FTX blow-up | TechCrunch

SVB Financial files for Ch. 11 bankruptcy protection, says it has $2.2B in liquidity | TechCrunch

Explainer: What caused Silicon Valley Bank’s failure? | Reuters

The Signature Bank Collapse: What You Need To Know | Bankrate