☕️ Why American Banks Are Collapsing 🤯 📉
Two of the largest banking collapses in US history happened this weekend.
Well reader, it’s finally happened. Despite our diligent Monday-Friday email updates, the news cycle finally beat us to the punch.
Shortly after our Friday morning email hit your inbox, sh*t hit the fan. Silicon Valley Bank was officially closed by the California Department of Financial Protection and Innovation.
While there’s still plenty of questions, we’ll do our best to fill you in on everything that led up to this and what’s happened since. Keep up, folks. This one’s a doozy.
☕️ Silicon Valley Bank Collapses 🏦 💥
Just days after the collapse of crypto-friendly bank, Silvergate, Silicon Valley Bank, favored by tech startups, was closed by regulators on Friday.
But this wasn’t exactly a failure on Silicon Valley’s part, “This was a hysteria-induced bank run,” said Ryan Falvey, a prominent fintech investor.
Amidst market turmoil last week, Silicon Valley Bank’s stock began to fall precipitously. Fearing a liquidity crisis, clients at the bank urgently began pulling their funds.
We’ll get into what caused this bank run, but this weekend was filled with investors, business owners, and workers who didn’t know if they’d see their money again.
The resulting bank run has led to the 2nd largest bank crash in U.S. history.
On Sunday, the US Treasury promised depositors that they would be made whole again, but emphasized that the bank would not be bailed out.
But first place still goes out to the 2008 Washington Mutual Bank Crash! Where are my 2008-financial-crisis-heads at!?
☕️ USDC Depegs 🪙 📉
USDC (USD Coin), a stablecoin pegged to the US dollar, lost its peg this weekend as a result of the fallout from the Silicon Valley Bank collapse.
All of this started because Circle, the creator of USDC, was unable to withdraw $3.3 billion in funds from Silicon Valley Bank.
USDC briefly fell as low as 88 cents. The stablecoin has since climbed back to 99.5 cents upon news that the US Treasury would protect Silicon Valley Bank customers.
USDC is not alone in the dive as DAI, the stablecoin circulated by MakerDAO, has also depegged. When stable coins become… unstable. It can have disastrous results.
The instability of stablecoins is leaving many unsure where to turn and a bartering system of trading pelts and bullets is becoming only more appealing.
☕️ Signature Bank Collapses ✍🏼 ❌
Just two days after the collapse of Silicon Valley Bank, New York State Regulators have shuttered crypto-friendly Signature Bank.
Signature Bank’s collapse marks the third largest bank collapse in US history, just 48 hours after the second largest closure, Silicon Valley.
In much the same fashion of Silicon Valley Bank, regulators have seized Signature Bank’s assets. The bank's assets are now moved into receivership of the FDIC.
While the banks’ owners and investors will not be bailed out, the FDIC and the US Treasury has promised to make all depositors whole again.
In short, crypto’s two largest banks are gone, but none of the customers who banked with them will lose their assets, the US government is keeping their funds afloat.
It’s proving difficult to write this many jokes about bank runs, so let’s just keep this rollercoaster chugging along, shall we?
Spilling the Beans
The Banks Come Tumbling Down 😳
What Exactly Happened at Silicon Valley Bank? And what does it mean for crypto?
Well, it’s certainly not a good thing, but it may not quite be the “buy flashlights and water” kind of bad the news outlets are leading you to believe.
First and foremost, and this is key, this was not a crypto problem. This was a banking problem, the oldest one in the book.
This was a good old fashioned bank run.
Bank runs: These have been happening for as long as we’ve had banks.
From 16th century English goldsmiths, to the Dutch Tulip mania, to It’s a Wonderful Life, bank runs are one of the inherent risks to any institution that holds deposits.
If you hold money for 10 friends and invest a portion of it… what happens if they come calling and want their money back?
A bank is only able to function because of customer deposits and faith. If all of the customers withdrew their money at once, a bank would cease to exist.
It would just be a building with “BANK” written out front.
Banks function by investing the large sums of money left in their custody in safe, modest interest investments. They only keep enough cash on hand to meet client demand.
Bank runs are the perfect example of how much of our economy depends on all of us believing in and trusting the economy. If we start to doubt it… the walls come tumbling down.
The real irony of a bank run is that it’s a lot like being put into the hospital for excessive hypochondria.
Customers of the bank are afraid of instability and insolvency, so tons of customers withdraw their funds at the time, forcing the bank to freeze withdrawals.
If a large enough percentage of customers attempt to withdraw their funds, like in the case of Silicon Valley Bank, that bank is going to need to sell off assets.
When things get really bad is when the underlying assets a bank uses to support itself drop in value… that’s exactly what happened to Silicon Valley Bank.
Silicon Valley Bank was the banking choice for about 44% of venture-capital-backed tech companies. The tech sector, like crypto, has had a rough go of it as of late.
And market fluctuations compounded with high interest rates were causing a lot of the SVB’s customers to withdraw money.
And poor communication from the bank itself didn’t convince its customers that the frequency of these withdrawals had to do with factors outside the bank, rather than instability within the bank itself.
And we need to remind ourselves that though this is affecting crypto, this is again, not a specifically crypto or stablecoin-related problem.
In addition to crypto firms and exchanges, small business owners and regular people with savings and checking accounts at SVB have been unable to access their deposits so far.
The US Treasury stepped in on Sunday to promise customers at all of these affected banks that their deposits will be protected, though notably: the bank owners will not.
So what happened? How did these Banks end up in such a dangerous position? Weirdly, it was by listening and trusting the US Government. Yep. You read that right.
Ultimately, these bank collapses have been a result of rising interest rates on Federal bonds. As the US raised interest rates to curb inflation, the bonds held by these banks became less value.
In other words: if you own a bond with a 1.5% interest rate, but everyone else owns one with a 3% interest rate, yours is suddenly worth a lot less.
So as the federal reserve has been hiking up interest rates, they’ve been devaluing the assets they sold to these banks who thought they were purchasing a safe government bond.
This is usually not a major issue as banks don’t ordinarily need to sell off their assets: but these are not ordinary times.
While there’s no telling what will come in the next few days, much of the trust and faith in this system comes down to the belief that the US Treasury will step in to make everyone whole.
So far, that does seem to be the government’s intent. But how the rest of the economy and crypto respond is truly anyone’s guess. We’ll keep you informed every step of the way.
Remember, much like global warming or watching Pedro Pascal’s inevitable fall from grace, we’re all going to get through this together.
Meme of the Day
Congrats on not being the main character of this financial collapse, Sam!
Well at least someone had a good weekend?
— Coffee & Crypto Daily (@GetCoffeeCrypto)
Mar 13, 2023
Depeg: This is when a stablecoin falls beneath its intended value or “peg.” USD-pegged assets are always meant to be worth $1. If they lose that value, they've depegged.
In the case of USDC, Circle was unsure of the safety of $3.3 Billion in assets at Silicon Valley Bank. That led investors to speculate that USDC was worth less.
Once investors saw that Circle hadn't lost the funds, USDC was able to regain its' dollar peg once again.
The Last Sip
With the recent market flux leaving stablecoins less than stable, here are a couple sources of stability that terrified investors should consider looking into:
- Granite countertops.
- Nalgene Bottles.
- A Mother’s Love.
Coffee & Crypto Team
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.