What Do The failures Of Silvergate Capital, Sillicon Valley Bank, And Signature Bank Mean For Regular Folks?

Banks have been falling like dominoes this month, leaving the financial sector shell-shocked. On 8 Mar 2023, Silvergate Capital, a US bank dealing mainly with crypto, announced that it had gone bust. Two days later, Silicon Valley Bank (SVB), the 16th largest bank in the US, collapsed. Two days after that, another US bank, Signature Bank, failed.

With three banks felled in a single week, news outlets are having a field day. But for people like us halfway around the world, what does it really mean?

It can be hard to empathise with news that’s breaking from so far away. However, those of you who are old enough to remember the collapse of Lehman Brothers in 2008 will also have fond memories of the global financial crisis it triggered. What will the fallout be like this time, and should we be worried?

 

Okay, who are Silvergate Capital, Sillicon Valley Bank, and Signature Bank? What happened?

Here’s a quick summary of the main things to know about the three banks involved in this train wreck.

• Silvergate Capital: Holding company for Silvergate Bank. Since 2016, the bank had bet big on serving the emerging crypto economy. On 8 Mar 2023, the company announced that it would be winding down bank operations.
• SVB: A major lender to start-ups, this bank released a statement on 8 Mar 2023 that it needed to raise $2.25 billion to shore up its balance sheet. Two days later, it collapsed after depositors withdrew more than $24 billion.
• Signature Bank: Like Silvergate, this bank also had a strong crypto focus but was much larger. In the evening of 12 Mar 2023, it was seized by banking regulators.

These three banks weren’t just random, unimportant financial institutions. Signature Bank and Silvergate Bank were two of the most popular banks for crypto companies. Meanwhile, nearly half of all US venture-backed startups had cash stashed with SVB, including crypto-friendly venture capital funds and some digital asset firms.

SVB and Signature have won the dubious honour of being the second and third largest banks, respectively, to fail in the US, behind Washington Mutual in 2008. Shucks.

 

How did 3 banks fall in under a week?

All 3 banks suffered from what is known as a bank run. A bank run happens when many clients withdraw their money from a bank because they fear its collapse.

The thing about bank runs is that they happen due to human psychology. People put their money into a bank with the belief that it will surely be open for business tomorrow. But once that belief is threatened, everyone, even seasoned investors, will want out asap. When one bank falls, this can set off a chain reaction that causes bank runs to happen at other banks too.

In this case, it started with the collapse of cryptocurrency exchange FTX in November 2022. FTX had funds with Silvergate, and could also possibly have been extended credit by the bank, so the collapse spooked the hell out of Silvergate customers, resulting in an $8.1 billion bank run.

The chain reaction continued in the coming days. On 9 Mar 2023 alone, SVB customers tried to withdraw $42 billion in deposits.

The next day, it was Signature customers’ turn to rush to withdraw cash. By Sunday morning, outflows had slowed, but the bank was seized by regulators in the evening.

 

What does it mean when regulators seize a bank?

A regulator is an entity appointed by the government to regulate a certain sector or area of activity. Most countries have a banking regulator that oversees banks and financial institutions operating within a defined jurisdiction. Singapore’s banking regulator, for instance, is the Monetary Authority of Singapore (MAS).

Banks are allowed to operate on condition that they fulfil certain requirements. The regulator acts as a kind of watchdog, ensuring that the banks are behaving themselves and fit to provide banking services. When they fail to satisfy these requirements, the regulator has the right to investigate or, where appropriate, step in and seize the bank.

When a bank is on the brink of collapse, regulators seize it to ensure that customers and creditors’ funds and dues are protected, that the bank continues to run with minimal disruptions, and that it can be properly liquidated, if necessary, later on. Without the regulator, it is much harder to control where the money goes after a bank’s collapse.

 

This is crappy for companies. But what about regular folks? Should we be worried?

When a big bank collapses, the regular people who are their customers are usually the first to suffer. In the case of our 3 banks here, the regulator is helping to protect those who have money with the bank, so people are unlikely to lose everything. The problem is that they have no access to that money right now. Those who are relying on that cheque to pay rent, buy groceries, make mortgage payments, etc., could find themselves in a bind.

But what about us regular folk here in Singapore? While we were certainly all shocked when Silvergate, SVC and Signature collapsed one after another, we needn’t be worried about ramifications on Singapore banking system. In a media release on 13 Mar 2023, the Monetary Authority of Singapore (MAS) assured Singaporeans that “Singapore’s banking system remains sound and resilient”. According to MAS, Singapore banks are well-capitalised, have healthy liquidity positions, and are supported by a stable and diversified funding base. Furthermore, MAS is on the lookout for any developments that might threaten our banks, and “stands ready to provide liquidity […] to ensure that Singapore’s financial system remains stable”.

As for crypto investors, it’s understandable if you’re quaking. Right after the Silvergate collapse, crypto prices plummeted. Fast Company reported that Bitcoin, Solana, and Ethereum were down almost 10% just 24 hours after the fall.

Yeah, you read that right. Bitcoin wasn’t spared—the first and highest-valued of all crypto assets today. And that, boys and girls, is the harsh reality of the crypto world. While we often glorify crypto for its decentralised nature, it still is very much entangled in the wider financial ecosystem and shares its vulnerabilities too. This doesn’t mean that we can’t continue to envision a crypto utopia. However, we need to recognise how its success is interlaced with its intermediaries. On the bright side, Bitcoin has weathered many storms, and many remain hopeful that this too will pass.

In the long term, one of the major concerns is that, with some of the biggest crypto banks gone, crypto companies may turn to less regulated institutions for their banking needs. This could make crypto, which is already volatile to begin with, even riskier for anyone entwined with the crypto industry.

 

So, is this a banking panic?

A banking panic happens when a whole bunch of depositors panic about the possible insolvency of their banks and start withdrawing money in cash.

The problem is, banks only keep part of customers’ deposits as cash reserves. A large part of the deposits are actually out on loan. So, in order to give the customers the cash they’re demanding, the banks need to liquidate these loans, resulting in mayhem.

Banks have tried to learn from past mistakes. In 1930, 1/5 of the banks in existence had collapsed by 1933. Nowadays, banks make sure they maintain higher capital levels to raise their resilience.

But, as you can see, disaster can still strike. What put Silvergate, SVB, and Signature in danger was their outsized exposure to crypto and tech start-ups, which are particularly vulnerable in a crisis.

Experts are still trying to work out if this will escalate into full-blown banking panic, and pressure on the Feds is mounting to curb inflation without pushing the economy into a recession. While they are busy trying to make up their minds, other banks are at risk of falling prey to bank runs.

 

Uh, gotta ask, does Temasek have any business in this?

Temasek has said that they don’t have direct exposure to SVB, according to a Bloomberg article published on Mar 12.

What now?

HSBC has swooped in as a white knight and acquired the United Kingdom arm of SVB for a symbolic £1 on 13 Mar 2023. This is a huge sigh of relief for ministers, regulators, technology start-ups, and customers. HSBC is one of the world’s largest banks, boasting US$2.9 trillion of assets. By rescuing the doomed bank, customers would be able to bank as normal. Phew.

US President Joe Biden addressed the banking panic on 13 Mar 2023, reassuring the world that the American banking system will hold up. He also vows to “strengthen the rules for banks to make it less likely this kind of bank failure will happen again”. This includes guaranteeing deposits in SVB and Signature Bank, setting up a new facility to give banks access to emergency funds, and making it easier for banks to borrow from the Federal Reserve in emergencies. We’ll find out the weight of those promises in weeks to come.

 

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