Alright, no joking this month. Three US banks have collapsed within a week: On March 8, 2023, a US crypto-oriented bank Silvergate Capital failed. Just two days later, Silicon Valley Bank (SVB), the 16th biggest bank handling almost 50% of capital from the tech field collapsed. Then soon enough, another US bank went busted as well.
No matter what’s going on, it doesn’t look too good. This is the largest bank failure since the economic collapse since 2008. And the financial market has been on Code red (Some funds have already withdrawn billions of capital from banks already!).
What about us? How does it affect you and me? Will it be another Lehman Brothers moment? Should we be worried?
But no sweat, we’re gonna break it down into 6 small bits for you.
Who Are Silvergate Capital, Silicon Valley Bank (SVB) and Signature Bank? And What Happened?
Here’s a short sum-up of these three major banks gone bankrupt:
Silvergate Capital
Silvergate Capital is a parent company of Silvergate Bank that is heavily involved in cryptocurrency. Its clients include big name crypto exchanges like Coinbase, Gemini and FTX. By 2020, Silvergate had become one of the leading banks in the crypto space as it’s one of the first banks accepting Bitcoin as collateral.
But the trajectory didn’t stay. Due to the FTX bankruptcy and the over 70% drop in Bitcoin value, customers had lost confidence and withdrawn $8.1 billion from the bank, which ultimately triggered a voluntary liquidation in March 2023.
Silicon Valley Bank (SVB)?
Only if you’re a techie, and working in the tech field, then you may know about Silicon Valley Bank. Otherwise, there’s a small chance you will know SVB.
In short, it’s the 16th biggest bank in the US that mainly serves tech companies, startups, and venture capitalists. Despite having fewer than two dozen branches, SVB claims to serve almost 50% of all venture-backed startups in the US.
But how did SVB collapse? It all began when SVB first sold $21 billion of securities from its portfolio at a nearly $2 billion loss and then announced a $2.25 billion share sale on March 8, 2023.
What if I told you your bank is selling its assets at a loss? What would you do? (It implies that the bank’s losing money…) Take out all your money from the bank, right? That selling move spooked markets and clients, so the share price of SVB Financial fell by 60%.
To add fuel to the fire, big-name VCs like Peter Thiel and Union Square Ventures told their companies to pull their money out of the bank. So, customers withdrew $42 billion from Silicon Valley Bank on Thursday, leaving the bank with $1 billion in negative cash balance. And that’s the straw that broke the camel’s back. On March 10, Federal Deposit Insurance Corporation (FDIC) took over the bank to prevent widespread fear.
Signature Bank
Then just 2 days later, another crypto-oriented bank, Signature Bank, got seized by the New York state regulators on March 12.
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Why Were the Banks Running Out of Money?
Financial terminology 101:
Bank run: The bank is running out of money when customers withdraw their money at once due to a loss of confidence or the fear of collapse.
Okay, but why did the customers withdraw their money all at once?
Crypto-triggered bank run…
Silvergate Capital and Signature Bank were the victims of the fraudulent crypto exchanges FTX failure and crypto price dropping over 70%. Customers lost confidence in the bank and high-risk assets, so they withdrew capital from the banks to run away from the banking-version of FTX. Yeah, self-fulfilling prophecy, they collapsed.
A year-long increased Fed interest rates…
Why is SVB running out of money? The Fed can be blamed with the year-round rate hikes.
During the low-interest time 2020-2022, the bank had too much money in their balance sheet, and they were looking for ways to park their cash.
SVB was no exception. It invested in comparatively safe securities, like long-term US Treasury bonds and mortgage bonds to earn a stable income. This should be a good deal.
However, the table has changed with the continuous rate hikes.
The SVB core client group, venture capital and tech companies, not only put less money into the banks, but also started to withdraw their money to improve liquidity. This dropped the cash balance for SVB.
Meanwhile, when the Fed raises the interest rates further, the bonds purchased by the banks during the low-interest time are becoming less worthy because the new bonds released by the US government have a higher return.
In a normal situation, SVB would just need to wait for the bonds to mature and it would receive the invested capital and the interest. Unfortunately, this didn’t work because SVB needed immediate cash so it started the sale of securities at a loss.
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What Happens When a Bank Is Seized by FDIC? What about the Deposits?
On March 10, Federal Deposit Insurance Corporation (FDIC) took over the SVB and Signature bank. When a bank is seized by the FDIC, that means the funds deposited in the bank are protected before the proper liquidation, including all funds exceeding the $250,000 limit.
What Impacts Could the Bank’s Collapse Have on the Financial Market?
The Silicon Valley Bank collapse could trigger a pause on the US rate hikes because the US Government is expected to do everything to save the banking industry. Financial analysts are expecting a pause on rate hikes. And we’ll know the Fed’s decision on the interest rates next week (Mar 21 – 22, 2023).
If the Fed decides to pause interest rate hikes, you can expect the following outcomes:
- Recovery of asset values: If interest rate rises pause, asset prices such as property prices and high-risk growth stocks are expected to recover from the price drop since last year.
- Higher inflation: Rate hikes are originally adapted to fight inflation. If the Fed pauses interest rate hikes, inflation is expected to rise more than before.
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Is It the Beginning of Another Financial Tsunami?
Financial Tsunami usually begins with a chain effect of corporate collapses due to insolvency coming from inadequate cash flow.
Though the US Government has stepped in to protect customer’s funds and the action has assured a certain degree of public confidence, it seems there’s something brewing under the water with the recent rumor of a bigger bank, Credit Sussie, being insolvent.
Maybe it’s the time to take a closer look at the bigger financial picture.
What Should You Do in Response to the News of Its Potential Collapse?
The FOMC meeting next week would tell the world the direction of the asset values for the coming months. You may want to pay attention to it and let’s see how things go.
As an investor…
As an investor, you know that making informed decisions is crucial to success. With this in mind, it’s highly recommended to stay up-to-date with the latest developments in the market. One event that you should be monitoring closely is the upcoming FOMC meeting next week— whether the Fed’s interest rate decision will shift from a hawkish stance to a more dovish one.
If such a shift were to occur, it’s expected that the market will have more liquidity, which could be a boon for high-growth stocks, property and cryptocurrency. This could present a great opportunity for you to revise your investment strategy and make the most of the changing market conditions.
As a mortgage holder…
If you’re a mortgage holder, you’ve probably felt the strain of the current economic climate last year. However, there may be some good news on the horizon. If the Federal Reserve decides to lower the interest rate, then things could take a turn for the better. No more paying high interest rates every month. (a huge relief!)
Plus, you might even see an increase in your property value, which would be a great financial boost. So, keep an eye out for any announcements from the Fed and stay hopeful for a positive change.
However, Keep an Eye on the Timing…
In short, things might look bright, but the rate pivot could easily turn into a full-blown collapse.
Timing is everything. Rate cuts to save the market from collapsing only works when companies are on the brink of dying out, not died out. So, if the rate pivots too late and companies are in a bad shape, they couldn’t be saved.
What is waiting for us would be an economic depression. But let’s keep hope and let’s see what’ll happen next week.
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