5min read
Published on: Apr 12, 2024
#Financial Markets
2023 was a tumultuous year for the global economy as it was marred with inflation, slow growth and high interest rates. It was particularly bad for the banking sector as multiple banks collapsed in the US and Europe, nearly squandering the global economy.
Last year, we saw five bank failures in the US out of which two were closed down in March itself.
All the three banks collapsed in the month of March itself. All of them, except the SVB, were engaged with the cryptocurrency sector on a large level.
The events led to a riotous banking crisis in the US. It could have created a catastrophic effect like the 2008 global financial crisis had not the US government intervened to contain the domino effect.
Today, we will have a critical look at the events in March 2023 when the US banking crisis unfolded within a span of only a few days.
During the early 2010s, the Federal Reserve instituted a zero-interest rate policy to stimulate the national economy in the wake of the 2008 financial crisis.
The period saw the proliferation of very risky, no-profit but fast growth tech start-ups in the Silicon Valley.
Remember that Bitcoin (BTC) also made its debut in 2009 with the purported goal of challenging the centralised financial order that was one of the factors blamed for the 2008 crisis.
Venture capital (VC) funding continued to funnel in the US during this phase, amounting to $971.2 billion during 2010-2020.
During the COVID-19 pandemic during 2019-21, the healthcare sector saw an exponential growth.
Value of VC investment (in USD) in the US, 2006-2022
Source: Statista
VC funding in the US hit $345.4 billion in 2021, a large proportion of it being allocated to the health sector.
We also witnessed a cryptocurrency bubble during the same period when BTC even crosses the price mark of $66k in October 2021. It wouldn’t touch the same high as late as March 2024.
With so much money flowing in, tech entrepreneurs flocked to deposit their funds in those banks that were relatively more receptive to such adventurous money than the more traditional banks.
Note that in the US, deposits are insured up to at least $250,000 per depositor. Any deposit exceeding this amount is uninsured.
Banks such as Silvergate Bank, Silicon Valley Bank and Signature Bank held a substantial amount in uninsured deposits.
The banks primarily invested in mortgage-backed securities (MBSs) and US bonds.
Now, these investments offered terrific returns for much of the early 2010s, thanks to the zero-interest rate policy of those years.
But the pandemic, coupled with geopolitical issues, gave rise to an inflation that wasn’t easy for the US government to contain.
Consequently, the Fed introduced a rise in interest rates during 2021-23 that led to substantially large losses in the banks’ investments in those MBSs and bonds during a rising rate environment.
When the customers of these banks realised that these institutions were in loss, they queued up to withdraw their funds (not literally, everyone has a smart phone these days 🙄).
2022 is also the year when the crypto industry began to implode, with Terra, BlockFi, Celsius Network, Voyager Digital and FTX collapsing during the year.
When VC funding in start-ups began to drop 2022 onwards, these ventures began to withdraw funds from the banks to run their operations.
Consequently, an illiquidity crisis erupted at the banks which then began to sell their investments in securities and bonds at a huge loss.
A catch-22 situation emerged where one action after another intensified the crisis at the banks, leading to bank runs and liquidations.
Let us see how the crisis unfolded at different banks and led to the ensuing banking crisis in the US.
California-based Silvergate Bank began its operations in 1988 and promptly entered the crypto segment around mid-2010s.
The bank provided its services to several leading crypto exchanges and other players in the sector which couldn’t do business with more conservatively oriented banks.
Its quicker clearing house services also attracted a large number of crypto entities as they could easily settle transactions in real-time.
By 2017, the bank held assets worth $1.9 billion.
By the third quarter of 2022, it had $12 billion in deposits from several high worth entities.
Around 90% of the bank's deposits came from crypto players.
But, in November 2022, FTX filed for bankruptcy. The bank held deposits worth $1 billion that were related to the FTX boss Sam Bankman-Fried “SBF.”
Though the bank claimed that it held only FTX deposits and wasn’t exposed to the exchange through lending, the relationship raised enough eyebrows and customers began to withdraw their funds en masse.
As customers queued up for withdrawals worth as much as $8 billion, the bank began to sell its investments to tackle the illiquidity crisis.
It realised a loss of $718 million on withdrawal-related asset sales in Q4 2022.
By December 2022, deposits in the bank fell to $3.8 billion.
It even secured a loan of $3.6 billion from the Federal Home Loan Bank of San Francisco.
After the Silvergate Bank failed to manage its illiquidity crisis, it announced on 8th March that it was going to voluntarily liquidate itself.
California-based SVB was founded in 1983 and served a large number of tech and healthcare clients of late.
During the tech boom of the pandemic years, the bank saw an exponential rise in deposits, totalling $100 billion.
It had assets worth $209 billion by the end of 2022.
The bank invested in long-dated bonds, hoping for good returns as it expected the Fed’s zero-interest rate policy to continue.
But, the value of these bonds declined as a result of the rise in interest rates as we mentioned above.
Come March 2023 and clients queued up for withdrawals en masse.
The bank was forced to sell securities worth $21 billion at a loss of $2 billion.
SVB’s customers withdrew as much as $42 billion around this time.
On 10th March, the bank was placed under the receivership of the Federal Deposit Insurance Corporation (FDIC). The FDIC is a US government corporation supplying deposit insurance to depositors in American banks.
By the end of the month, North Carolina-based First Citizens Bancshares acquired SVB and bought $56.5 billion in deposits and $72 billion in loans.
The failure of the SVB was the third-largest bank failure in the US history.
New York-based Signature Bank was founded in 2001.
Though the bank was involved in the multifamily rental housing market in its initial years, it began to flirt with the crypto sector during the 2020-22 bubble.
The bank counted Binance, Coinbase and Celsius among its clients.
Deposits in the bank grew from $36.3 billion around 2018 to $104 billion by August 2022, with around 25% of it being crypto-focused.
But the collapse of FTX in November 2022 led to a flurry of withdrawals at Signature.
By the end of the year, deposits in the bank stood at $88.6 billion.
On 12th March, the bank was placed under the receivership of the FDIC.
On 19th March, the New York Community Bank acquired $38.4 billion in assets from the Signature Bank in a $2.7 billion deal.
It was later revealed that the Signature Bank was already under investigation by the Department of Justice (DoJ) and the Securities & Exchange Commission (SEC).
The failure of the SVB was the fourth-largest bank failure in the US history.
The US government stepped in promptly, with the Fed and Treasury vowing to backstop all deposits in the SVB and the Signature Bank. These included deposits exceeding amounts of $250,000.
It meant that all the customers who held deposits at these two failed banks would get all of their money back regardless of whether their deposits were insured or not.
Subsequently, Fed Chair Jerome Powell launched the Bank Term Funding Program, a generous emergency credit available to eligible financial institutions.
(The programme ceased extending new loans on 11th March 2024.)
President Joe Biden remarked, “Every American should feel confident that their deposits will be there if and when they need them.”
Nonetheless, the banking crisis of March 2023 continued to spiral both in the US and Europe.
In the US, the First Republic Bank later collapsed in what was the second-largest bank failure in the US history. JP Morgan purchased the bank in a matter of days.
In Europe, the Swiss bank Credit Suisse collapsed and got acquired by its competitor bank, the UBS Group.
What Should BitDelta Users Know?
The US banking crisis in 2023 was a major hiccup in the global economy after the 2008 crisis. Though people were quick to blame it all on crypto, a serious study reveals that there was a myriad of factors responsible for the banking crisis last year, crypto just being one of them.
We recommend BitDelta users should learn about the crisis as it continues to loom over the economies of several countries even today.
Drawing lessons from such events, users can be better informed and equipped to deal with any potential crises in the future.
We are dedicated to educating our users about different financial topics relevant to the day.
Keep following the BitDelta Academy to stay up to date with the latest market trends.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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