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Recent bank crises

There have been several bank crises across the world since 2022. Three major U.S. banks failed in 5 days during March of 2023. Below is a brief explanation as to what caused these failures.

Bank Crises by chris@kilmerco.com

Silvergate Bank failed

Silvergate was a California-based bank which focused on serving cryptocurrency companies and their clients. Crypto company customers would give cash to a crypto company in exchange for the cryptocurrency. The crypto company would deposit that cash at Silvergate which Silvergate would either hold as cash or invest into secure bonds in order to earn interest. When the customer later sold the cryptocurrency back to the company, the company would withdraw the necessary cash from Silvergate and then give that cash to the customer.

Investors withdrew more than $1 trillion from cryptocurrency investments in 2022 as rising interest rates offered better returns through safer investments. Crypto clients requested $8 billion of withdrawals from Silvergate during the last three months of 2022. Silvergate was forced to sell U.S. Treasuries which had lost value due to the rapid rise of interest rates in 2022. This resulted in a $1 billion loss for Silvergate in the span of only 3 months. Silvergate was also forced to borrow $4.3 billion from the Federal Home Loan Bank system in order to fund the withdrawals.

To make matters worse, Silvergate had acted as the banker for cryptocurrency company FTX and Alameda Research. In 2022, government regulators prosecuted FTX and Alameda Research for fraud. Regulators then investigated Silvergate to determine if it had played any part in the fraud.

In March of 2023, Silvergate announced that it was reviewing whether or not it could continue to operate as a result of these developments. Silvergate began the process of liquidating its assets on March 9, 2023. Thankfully, Silvergate had enough remaining assets to refund the deposits of its customers without any need for government assistance.

Silicon Valley Bank failed

Silicon Valley Bank (SVB) was a California-based bank which largely assisted tech start-ups. As of December 31, 2022, SVB held $212 billion in assets and $342 billion in client funds. In 2020, SVB invested $21 billion of deposits in 3 to 6 year Treasuries paying an annual interest rate of about 1.6%.

The interest rates of Treasury bonds rose quickly in 2022, causing the value of the Treasuries SVB held to fall greatly. Many of SVB’s largest depositors recently decided to withdraw their deposits from SVB. Some believe that the withdrawals were needed to cover the major losses the tech industry experienced in 2022.

SVB was forced to sell its low interest paying bonds at a $1.8 billion loss in order to generate the cash necessary to fund depositors withdrawals. This spooked smaller depositors, initiating mass withdrawals of $42 billion. Investors quickly sold their shares of SVB stock, causing the stock price to fall 60% in a single day.

The FDIC announced the bank’s failure and assumed receivership (control) of SVB on March 10, 2023. This was the 2nd largest bank failure in U.S. history. SVB’s failure unnerved investors, causing the market value of U.S. banks to fall by $100 billion in only a few days.

The government tried to prevent a larger banking crisis

Signature Bank was a large bank based out of New York which managed $110 billion in assets and $88 billion in deposits as of the end of 2022. Signature catered to high net-worth individuals. Nearly 25% of its deposits came from the cryptocurrency sector.

On March 12, 2023, New York state regulators shut down Signature Bank in a bid to prevent the spreading banking crisis. This was the 3rd largest bank failure in U.S. history.

Secretary of Treasury Janet Yellen announced that depositors at SVB and Signature will have access to all of their money starting March 13th. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

The FDIC holds money reserves to help protect depositors in the event of a banking crisis. These reserves are funded by mandatory contributions made by U.S. banks. The FDIC’s reserves were valued at $125 billion as of September of 2022. The FDIC stated that any loss to its reserves to support the depositors of Silicon Valley Bank and Signature Bank will be recovered by a special assessment (mandatory contribution) from U.S. banks.

The Federal Reserve also established the Bank Term Funding Program (BTFP). The BTFP offers one-year loans to banks, savings associations, and credit unions in exchange for acceptable collateral such as U.S. Treasuries. This will eliminate the need for a bank to quickly sell its securities in order to meet the needs of its depositors. 

Disclosures

The views and opinions expressed are based on current economic and market conditions and are subject to change.  There is no guarantee that any statements of future expectations will come to fruition.  All information presented is collected from sources believed to be reliable, but may not be guaranteed.  It is meant to provide general education and should not be considered investment advice, or a recommendation to take a particular course of action.  United Planners is not affiliated with any other entities referenced.

References

Silver Gate Bank Failed

  • https://www.theguardian.com/technology/2023/mar/09/crypto-bank-silvergate-liquidation-sector-turmoil-wind-down-ftx-exchange
  • https://finance.yahoo.com/news/why-silvergate-bank-winding-down-142326734.html
  • https://finance.yahoo.com/news/silvergate-crypto-collapse-differed-silicon-220822674.html

Silicon Valley Bank Failed

  • https://www.svb.com/newsroom/facts-at-a-glance/
  • https://finance.yahoo.com/quote/VGT
  • https://www.reuters.com/business/finance/what-caused-silicon-valley-banks-failure-2023-03-10/
  • https://fortune.com/2023/03/11/silicon-valley-bank-run-42-billion-attempted-withdrawals-in-one-day/
  • https://finance.yahoo.com/quote/SIVB
  • https://www.reuters.com/business/finance/what-caused-silicon-valley-banks-failure-2023-03-10/
  • https://www.cnn.com/2023/03/11/business/svb-collapse-roundup-takeaways/index.html
  • https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/

The Government Tried to Prevent a Larger Banking Crisis

  • https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/
  • https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/
  • https://www.cnbc.com/2023/03/12/regulators-close-new-yorks-signature-bank-citing-systemic-risk.html
  • https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/
  • https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm?ref=upstract.com
  • https://finance.yahoo.com/news/regulators-seize-signature-bank-in-third-largest-us-bank-failure-231404695.html
  • https://www.reuters.com/business/finance/what-caused-silicon-valley-banks-failure-2023-03-10/
  • https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm

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