U.S. Banking Crisis Sends Shockwaves Through Global Economy: What Happened and What's Next?

Silicon Valley Bank (SVB), one of the most popular financial institutions and the 16th largest lender in the United States, announced on 8th March 2023 that it had suffered a $1.8 billion after-tax loss and urgently needed to raise more capital to quell depositors' concerns.

By 11th March, SVB's chances of getting access to more funding appeared paper thin. That led the Federal Deposit Insurance Corporation (FDIC) to take over the bank after failed attempts to sell it to healthier banks. On the same day in the afternoon, FDIC announced that customers who had up to $250,000 per account deposited with SVB, which was the nation's one of the largest banks, would have access to their funds by the 13th of March morning. But it wasn't known at the time what would happen to deposits that exceeded $250,000, the limit the FDIC insures in the event of a bank failure. 

Over the weekend, the Federal Reserve, Treasury Department, and FDIC announced that SVB and another two banks of the U.S. which are the most popular and also the crypto-friendliest banks in the country, Signature Bank, and Silvergate Bank’s failures posed a big enough risk to the entire banking system that it merited allowing regulators to take the unusual step of guaranteeing the larger deposits.

Here we will try to explore what happened with these banks and How did this happen so fast?

What happened to SVB?

The collapse of Silicon Valley Bank (SVB), a 40-year-old California-headquartered bank that had become a startup tech sector favorite, has shaken the financial world in the past few days. The demise of Silicon Valley Bank can be attributed primarily to a classic bank run that ensued following the appearance of warning signals in the second week of March. The bank takes deposits from clients and invests them in generally safe securities, like bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less. However, the rise in interest rates by the Federal Reserve has had a detrimental impact on the value of these bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less. That wouldn’t normally be an issue — SVB would just wait for those bonds to mature — but because there’s been a slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients started withdrawing their money.

On the 8th of March, SVB’s parent company, SVB Financial Group, announced its intention to carry out a share sale worth $2.25 billion, following a loss of approximately $2 billion from selling securities valued at $21 billion from its portfolio. The primary aim of this measure was to fortify the company's balance sheet, but it resulted in creating a sense of panic among the markets and clients, ultimately leading to a considerable drop in the share price of SVB Financial on the following day. By Friday morning, trading of the stock had ceased, and it was reported that SVB was negotiating a sale. Esteemed venture capitalists such as Peter Thiel and Union Square Ventures purportedly advised their companies to withdraw their investments from the bank while there was still a chance to do so, then people started freaking out, and unfortunately, it would appear rightly so. 

Finally, the bank officially collapsed, forcing the federal government to step in. Just before its failure, the bank reported it had $212 billion in assets. Its collapse is the biggest since the 2008 global financial crisis.

What led to the collapse of Signature Bank?

Signature Bank, a New York financial institution with a big real estate lending business that had recently made a play to win cryptocurrency deposits, closed its doors abruptly on Sunday (March 12, 2023), after regulators said that keeping the bank open could threaten the stability of the entire financial system.

The Federal Deposit Insurance Corporation (FDIC) took control of Signature Bank, which had $110.36 billion in assets and $88.59 billion in deposits at the end of last year, according to New York state's Department of Financial Services.

The signature Bank was a renowned financial institution that operated as a commercial bank, catering to exclusive private clients across several states including New York, Connecticut, California, Nevada, and North Carolina. The bank boasted an impressive portfolio of nine national business lines that spanned diverse sectors such as commercial real estate and digital asset banking.

Signature Bank customers spooked by the sudden collapse of Silicon Valley Bank withdrew more than $10 billion in deposits, That run on deposits quickly led to the third-largest bank failure in U.S. history. Regulators announced late Sunday that Signature was being taken over to protect its depositors and the stability of the U.S. financial system.

What happened in Silvergate Bank?

Silvergate Bank, which had been a cornerstone in the crypto world, has declared its imminent closure and intends to restitute all deposits. Silvergate has just over $11 billion in assets, compared with over $114 billion at Signature. Bankrupt crypto exchange FTX was a major Silvergate customer. 

It’s been clear for a while that the company was struggling along with some of its most high-profile clients like FTX and Genesis. In January, its earnings report revealed that it lost a billion dollars in one quarter after its customers withdrew $8.1 billion. Then, on March 1st, it filed a document saying its financials were even worse than the quarterly report had shown.

There are several concerns about what the crypto landscape will look like without Silvergate, especially when it comes to where companies will turn to get cash. One of the major concerns is that crypto companies may turn to less regulated institutions for their banking needs, potentially making the space even riskier for everyone involved. In other words, if there isn’t a bank playing by the rules and willing to do business with them, they may have to find a bank that doesn’t.

As for the next steps for the bank, it’s liquidating in an orderly manner and in accordance with applicable regulatory processes and is considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets. It also shut down its Silvergate Exchange Network, which let crypto exchanges like Coinbase, Gemini, and Kraken move money between themselves and other institutions earlier this month.

As all of this has been going down, companies like Coinbase, Crypto.com, and Paxos have started moving away from the bank. Even the Tether stablecoin took the opportunity to distance itself from the institution. Its list of allies was thin, and the government was scrutinizing it for its role in the FTX meltdown.

Silvergate’s collapse will almost surely draw scrutiny from lawmakers, especially those who are concerned about the crypto contagion reaching the traditional financial sector.

How Federal Reserve is handling this Bank Collapse incident in the U.S.?

Fearing contagion would upend the industry, the US Federal Reserve, Treasury Department, and Federal Deposit Insurance Corp. moved quickly over the weekend to protect customer deposits and shore up confidence in the banking system. The Fed, Treasury, and FDIC agreed on Sunday that the banking wobbles unfolding over the past few days had reached a “systemic level” and the Federal Deposit Insurance Fund (DIF) would guarantee insured and uninsured depositors. The Fund has $125 billion (bn) and it can borrow another $100 bn from Treasury. The statement suggests that the ultimate costs will be paid for by banks via the levy on them for deposit insurance.

The Fed set up a new borrowing facility, the Bank Term Funding Program (BTFP) offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions, pledging U.S. Treasuries, agency debt, and mortgage-backed securities, and other qualifying assets as collateral. The assets will be valued at par so that banks won’t have to sell U.S. treasuries at a loss in order to redeem deposits as was the case for SVB. According to the FDIC, banks had about $600bn in unrealized losses on U.S. Treasuries and MBS at the end of 2022. The Fed would be taking on securities that have lost value as interest rates have gone up, but the Fed doesn’t have to mark-to-market. In the event a bank does not repay its loans to the Fed, the Fed could hold the collateral to maturity when it would be redeemed at par. The Treasury has guaranteed $25bn in lending through the BTFP using the Exchange Stabilization Fund.

What comes next in the banking crisis? 

The collapse of Silicon Valley Bank, Silvergate Bank, and Signature Bank in the US sent ripples through the financial markets across the world. Stock markets sank in Asia and faltered in Europe, with banks sliding on contagion fear after the collapse of two lenders. And now, investors have predicted that another big bank is set to collapse. The problem is the bond market and experts are saying that the bond market will put the US in "serious trouble" as they also expect the American dollar to weaken.

The US dollar is losing its hegemony in the world right now. So they're going to print more and more and more of this and trying to keep this thing from sinking. This year maybe we can see many financial changes, collapse, or bankruptcy.

Sources: USA TODAY, CNBC, FORBES, VOX, ROUTERS, WALL STREET.