Liquidity crisis in TradFi is set to roil crypto markets
@BigBlackCrypto
On March 10, 2023, Silicon Valley Bank collapsed in just two days, marking the biggest bank failure since the 2008 financial crisis. Before its collapse, the CEO sold $3.57 million of stock within the last two weeks. The California Department of Financial Protection and Innovation closed the bank, and the FDIC was appointed as the receiver. Silicon Valley Bank was the 16th largest U.S. bank, with $210 billion in assets.
The timeline of Silicon Valley Bank’s collapse is as follows:
- SVB began to face a run on the bank as $91 billion in bonds faced interest rate risk.
- A firesale of $21 billion bond portfolio was announced.
- Over $1.8 billion was lost during the firesale.
- SVB announced a $2.3 billion share sale to cover bond losses.
- Credit agencies cut SVB’s credit ratings.
- SVB failed to raise capital as investors panicked.
- The U.S. banking sector lost nearly $100 billion in market cap in 24 hours.
- SVB announced its intention to sell the company.
- Regulators and FDIC took control of SVB.
- The second largest bank collapse in US history seemingly happened overnight.
The fallout from Silicon Valley Bank’s collapse is severe. Currently, 93% of all deposits at SVB are above the $250,000 FDIC insurance limit, and only 2.7% of Silicon Valley Bank deposits are less than $250,000. Meaning, 97.3% aren’t FDIC insured. Circle’s USDC, the second largest stablecoin with $43 billion market capitalization, has an undisclosed part of its $9.8 billion cash reserves at the now-collapsed Silicon Valley Bank.
Furthermore, if Silicon Valley Bank fails, this could be the Lehman moment for the startup world. The bank plays a crucial role in billions of dollars in venture debt, untold amounts of warrants, and convertible notes in early-stage firms. Therefore, if the bank’s collapse triggers a chain reaction, the startup world will feel its effects.
The impact of Silicon Valley Bank’s collapse is not limited to the bank’s depositors and clients. Share prices of other regional banks, such as First Republic Bank, Western Alliance Bancorp, PacWest Bancorp, and Signature Bank, have plummeted. For instance, First Republic Bank’s share prices dropped by 23%. It’s 2008 all over again… but so so much worse.
This recent event also raises concerns about the FDIC’s handling of the crisis. Venture lenders, such as SVB, are reliant on venture capitalists not aggressively pursuing amortization of debt or triggering default for covenant foot faults (e.g., cash balances). Therefore, the FDIC’s handling of the situation is essential to prevent mass defaults.
Silicon Valley Bank also offered wealth management services to many of its founders. Therefore, corporate lenders, corporate banks, personal mortgage lenders, and family’s wealth managers are all one bank, which is now in FDIC receivership. The fallout from Silicon Valley Bank’s collapse is far-reaching.
Finally, this collapse is also affecting companies that don’t bank with SVB because their payroll providers use the bank to make payroll deposits. Payroll is currently being missed, and founders are being locked out of their bank accounts for unknown reasons.
The collapse of Silicon Valley Bank is a significant event that has far-reaching implications. The FDIC’s handling of the crisis will be critical in preventing a chain reaction that could affect the startup world. Furthermore, the fallout from the collapse is not limited to the bank’s depositors and clients, but it affects the broader banking sector and the economy as a whole. The potential ripple effects of this collapse are yet to be fully understood, but it is clear that the impact will be felt across various industries and markets. The collapse of a bank as large and influential as Silicon Valley Bank is a stark reminder of the fragility of our financial system, and the need for robust regulatory oversight. It is a wake-up call for policymakers to reassess the risks posed by the concentration of banking power in a few large institutions, and to take steps to mitigate those risks. The collapse of Silicon Valley Bank serves as a cautionary tale for the entire financial industry, emphasizing the importance of risk management, capital adequacy, and transparency.
It affects other regional banks and their share prices, as well as companies that rely on SVB for payroll deposits. The fact that 97.3% of SVB’s deposits are not FDIC insured is also a cause for concern, as it raises questions about the overall stability of the banking system and the adequacy of deposit insurance. Moreover, the collapse of SVB could lead to a broader loss of confidence in the banking sector and the financial system, potentially triggering a wider economic downturn.
The fall of SVB also highlights the risks associated with high levels of debt and leverage in the financial system, particularly in the context of low interest rates and a prolonged periods of easy monetary policy. It underscores the need for effective regulation and oversight to prevent excessive risk-taking and ensure the stability of the financial system.
The collapse of Silicon Valley Bank is a stark reminder of the fragility of the financial system and the potential for systemic risks to emerge. It serves as a cautionary tale for regulators, investors, and financial institutions alike, highlighting the importance of risk management, transparency, and effective oversight in ensuring the stability and resilience of the financial system.
ADDENUM — How Bad is The Oulook?!
According to recent statistics, a potential bank run of Silicon Valley Bank (SVB), Silvergate, and Signature Bank could result in a liquidity crisis in the cryptocurrency market, leading to a crypto winter.
Silicon Valley Bank: $210 BN (93% uninsured)
Silvergate: $10.5 BN (approx.)
Signature: $114 BN
Eth Unlock: $26 BN
Total: 350,500,000,000
SVB and Silvergate serve as primary banks for the cryptocurrency industry in the United States, providing banking services to some of the largest cryptocurrency exchanges and companies. Their bank runs can result in a significant loss of liquidity in the cryptocurrency market, leading to a decrease in trading volumes and prices.
Moreover, Signature Bank’s ongoing class action lawsuit and the subsequent withdrawal of deposits by its customers could trigger a bank run, leading to the bank’s insolvency. This situation can further cause other banks and exchanges that rely on Signature Bank for liquidity to face a liquidity crisis, leading to a ripple effect in the cryptocurrency market.
The unlocking of $26 billion worth of Ethereum tokens can also exacerbate the liquidity crisis in the cryptocurrency market, causing a significant drop in prices. Additionally, the SEC’s crackdown on exchanges and their staking services can force exchanges to liquidate their positions, leading to significant sell-offs in the market. The fines imposed by the SEC can also force cryptocurrency companies and exchanges to liquidate their assets, leading to a further decrease in prices.
Stablecoin outflows and exchanges with significant altcoin exposure in their balance sheets can also be used as indicators of the health of the cryptocurrency market during a downturn. An increase in stablecoin outflows can signify a liquidity crisis, while exchanges with significant altcoin exposure can be more vulnerable to insolvency.
In summary, the potential bank runs of SVB, Silvergate, and Signature Bank, along with the unlocking of $26 billion worth of Ethereum tokens, can trigger a liquidity crisis in the cryptocurrency market, leading to a crypto winter. Therefore, monitoring stablecoin outflows and exchanges with significant altcoin exposure can help determine the health of the market during a downturn.
#Bitcoin #Silvergate #SVB #SiliconValleyBank #Ethereum #cryptocrash #cryptowinter #crypto
#cryptonews #cryptocurrency #FTXcontagion #FTX #Contagion
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