The Impact of the Bank Failure Storm on the Cryptocurrency Market
Introduction
As traditional banks operate under strict regulations to maintain stability, bank failures can still occur due to various reasons such as mismanagement or high exposure to risky assets. These failures can have a ripple effect on the financial system, including the cryptocurrency market. While some failures may negatively impact investor confidence, others may drive investors towards alternative assets like cryptocurrencies. This article provides an in-depth assessment of the recent bank failure storm, its impact on the crypto industry and the broader international financial system.
An Overview of the Recent US Bank Failure
The Collapse of Silvergate Bank
Source: ir.silvergate.com
Silvergate Bank is a California-based commercial bank that specializes in providing financial services to businesses in the Fintech and Cryptocurrency industries. The bank was founded in 1988 and is headquartered in La Jolla, California. Silvergate Bank is known for being one of the few banks that openly supports cryptocurrency-related businesses, providing them with banking services such as wire transfers, deposits, and loans.
The bank suffered a significant blow when FTX, one of its prominent customers, collapsed n the last quarter of 2022.
The news of FTX’s downfall frightened other Silvergate clients, resulting in a massive run on the bank that saw 60% of its deposits withdrawn in just one quarter, totaling $8.1 billion. This withdrawal was reported in Silvergate’s earnings report for January, which also showed that the bank had incurred a loss of one billion dollars in the first quarter of 2023.
Following its failure to submit its annual report on Form 10-K to the Securities and Exchange Commission (SEC) for the fiscal year ending on December 31, 2022, regulators have initiated investigations into Silvergate. While the company was granted an extension until March 16, it decided to cease operations when it was announced on March 3, 2023.
"In light of recent developments in the industry and regulatory landscape, Silvergate has concluded that an orderly wind-down of its banking operations and a voluntary liquidation of the Bank represent the optimal course of action," the company stated. "The bank’s wind-down and liquidation plan includes the complete repayment of all deposits."
Note: A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission, that gives a comprehensive summary of a company's financial performance.
The Collapse of Silicon Valley Bank
Silicon Valley Bank (SVB) is a top bank in the US that specializes in providing business banking services, particularly to start-ups and venture-backed businesses. The bank has experienced significant growth in recent years, resulting in a sizable amount of deposits and assets. However, as the Federal Reserve increased interest rates to counter high inflation, SVB’s investments in long-term debts like Treasury bonds became riskier, leading to a decline in their value.
Additionally, some of SVB's customers faced financial difficulties, leading to sizable withdrawals from their accounts. To handle these withdrawals, SVB liquidated some of its investments, resulting in losses of $1.8 billion.
Timelines of the Collapse
The failure of Silicon Valley Bank occurred within a short span of a few days, from an external viewpoint. The timeline of events leading to the bank's failure is as follows:
On March 8, the bank declared a loss of $1.8 billion on its bond portfolio and planned to sell common and preferred stock worth $2.25 billion. SVB Financial Group, the bank’s holding subsidiary, had a sharp decline in its stock on March 9. Furthermore, SVB customers started withdrawing their money, leading to a total attempted withdrawal of $42 billion.
Trading was stopped for SVB Financial Group stock on March 10, and before the bank could open on the same day, federal regulators announced their takeover of the bank. When authorities were unable to secure an investor, savings were transferred to an FDIC-created and operated bridge bank, with the guarantee that protected funds would be accessible by March 13.
On March 12, in response to the bank’s meltdown, regulators declared contingency methods, enabling clients to retrieve all deposits.
On March 17, SVB Financial Group filed for bankruptcy, and on March 26, First Citizens Bank purchased all of Silicon Valley Bridge Bank except for $90 billion of securities and other assets that remained in FDIC receivership.
Source: www.federalreserve.gov
The Collapse of Signature Bank
Signature Bank is a New York state-chartered commercial bank that primarily serves privately owned businesses, including law offices, real estate buyers, and cryptocurrency companies. It has 40 private client offices throughout metropolitan New York, Connecticut, California, Nevada, and North Carolina, and was ranked as the 19th largest bank in the US as of December 2022. The bank is recognized as a dominant player in New York real estate lending and is the first FDIC-insured bank to create a blockchain-based digital payments platform.
The collapse of Signature Bank followed the recent failures of Silvergate Bank and Silicon Valley Bank, which had a significant amount of uninsured deposits and exposure to the cryptocurrency sector, further raising concerns about the vulnerability of the financial system.
Although Signature Bank had attempted to diversify its portfolio and limit its crypto-related deposits as it had stated at the end of 2022, customers withdrew their deposits after shares plummeted by almost 25%. Customers shifted their deposits to larger banks such as JPMorgan Chase and Citigroup, fearing the bank would suffer the same fate as Silicon Valley Bank.
Due to fear of continued withdrawals, the New York State Department of Financial Services took control of Signature Bank on March 12, 2023, appointing the FDIC as the bank's receiver to protect depositors.
Timelines of the Collapse
On March 9, 2023, Signature Bank issued a press release to reassure investors and regulators of its solid investment ratings, diversified deposit mix, and limited digital-asset related deposit balances. However, on March 10, 2023, Silicon Valley Bank was closed, and Signature Bank's stock price dropped by 79%.
On March 12, 2023, the FDIC transferred all the deposits and nearly all the assets to Signature Bridge Bank, while it looked for potential bidders for Signature Bank.
On March 19, 2023, the FDIC announced that Flagstar Bank, a subsidiary of New York Community Bancorp, would acquire almost all deposits and some loan portfolios of Signature Bank, and about $60 billion in loans would remain in FDIC receivership. The FDIC would cover approximately $4 billion in deposits related to digital banking assets.
The Collapse of Credit Suisse
Credit Suisse, the second-largest Swiss bank, has been beset with a series of controversies, changes in leadership, and substantial losses in recent times. In 2020, the former CEO resigned due to a spying scandal, while the head of wealth management left to join UBS and was subsequently subjected to surveillance to determine whether he had taken clients with him. The bank incurred significant losses in 2021 due to the downfall of Archegos and Greensill Capital, leading to the departure of the CEO of the investment bank and the chief risk and compliance officer. An inquiry revealed the bank had not managed its risk effectively. In 2022, the chairman resigned following a scandal connected to breaching COVID-19 quarantine protocols.
A strategic review was unveiled by the new CEO, Ulrich Koerner, in mid-2022, but it failed to win the confidence of investors. In late 2022, rumors of a possible failure of the bank led to clients withdrawing $119 billion of funds. The bank sought to shore up liquidity and confidence by announcing plans to borrow up to $54 billion, but the Saudi National Bank, the bank's main backer, declined to give more money due to regulatory barriers. As a result, the future of Credit Suisse is uncertain, with its shares losing over 75% of their value over the past year.
Source: Reuters.com
The Collapse of First Republic Bank
First Republic Bank, a San Francisco-based financial institution, provides personal banking, business banking, and private wealth management services. At the end of last year, the bank’s total assets amounted to $212 billion. However, the bank’s stock price has plummeted 87 percent due to significant withdrawals by large depositors. The cause of the liquidity crunch can be traced back to the collapse of Silicon Valley Bank, which led to a wave of nervous customer withdrawals.
Moreover, the bank had a high number of uninsured deposits that were not backed by the U.S. government or the FDIC. This further fueled depositors' concerns and led to more withdrawal requests. Specifically, 68 percent of the bank’s deposits were uninsured, which was higher than many other regional banks.
To address the liquidity crisis, First Republic secured extra borrowing capacity from the Federal Reserve and JP Morgan Chase.
Additionally, a consortium of 11 large banks, including Bank of America, Citigroup, and Wells Fargo, provided the bank with a $30 billion deposit infusion. These moves helped stabilize First Republic's stock, which had lost over 70 percent of its value since the start of March. However, they also led to credit rating downgrades by S&P Global and Fitch Ratings. In response to the liquidity crunch, First Republic's management reportedly considered selling the bank.
Source: Reuters.com
The Ups and Downs of Traditional Finance and the Banking System
Ups of Traditional Finance and the Banking System
Financial Intermediation: One of the significant ups of the traditional finance system is its ability to mobilize savings and channel them towards productive activities. Banks act as intermediaries between savers and borrowers and enable individuals and businesses to access credit.
Risk Management: Banks play a crucial role in managing risk in the financial system. They assess the creditworthiness of borrowers and provide them with loans based on their ability to repay. This helps reduce the risk of default and ensures the stability of the financial system.
Economic Growth: Traditional finance and the banking system have been instrumental in driving economic growth. Banks provide funding to businesses, which, in turn, creates jobs and boosts economic activity. This leads to higher productivity, increased consumer spending, and overall economic growth.
Financial Innovation: Traditional finance has been responsible for many financial innovations that have improved the efficiency of the financial system. Examples of financial innovations include ATM machines, credit cards, and online banking.
Downs of Traditional Finance and the Banking System
Systemic Risk: Traditional finance and the banking system are vulnerable to systemic risk, which can result in financial crises. In the event of a crisis, the failure of a single bank can prove disastrous to the entire financial system, resulting in widespread financial instability.
Lack of Transparency: The traditional finance system is known for its lack of transparency. Banks are often opaque in their operations, making it difficult for regulators and consumers to fully understand their activities. This lack of transparency can lead to fraud, corruption, and other unethical practices.
Inequality: Traditional finance and the banking system can contribute to income inequality. Banks tend to favor large corporations and wealthy individuals over small businesses and low-income individuals. This can lead to a concentration of wealth in the hands of a few, exacerbating income inequality.
High Fees and Interest Rates: Traditional finance and the banking system often charge high fees and interest rates, especially for low-income individuals and small businesses. These high costs can make it difficult for them to access credit and financial services, further contributing to financial exclusion.
Centralized Control: The traditional finance system is highly centralized, with a few large financial institutions dominating the market. This concentration of power can limit competition and innovation, leading to a lack of diversity in the financial products and services available to consumers and businesses.
Impact of Bank Failure Storm on the Cryptocurrency Industry
In the first week of March, confidence in stablecoins was eroded when Circle, the issuer of USDC, the second-most liquid U.S. dollar-pegged stablecoin, revealed that it had $3.3 billion banked with Silicon Valley Bank, causing USDC to lose its peg and drop below 87 cents at one point on Saturday, March 11 2023. Circle, which has long been considered one of the more responsible players in the digital assets ecosystem, has close connections and backing from traditional finance, having raised $850 million from investors like BlackRock and Fidelity, and had announced plans to go public.
Another popular dollar-pegged virtual currency, DAI, which is partially backed by USDC, traded as low as 90 cents on Saturday March 11 2023, such that a couple of exchanges temporarily suspended USDC-to-dollar conversions. As a result, some traders began exchanging their USDC and DAI for tether, the world’s largest stablecoin, with a market value of over $72 billion. Tether’s issuing company had no exposure to Silicon Valley Bank and is currently trading above its $1 peg as traders seek safer havens.
Following Circle’s announcement to "cover any shortfall using corporate resources," there was a rebound in the stablecoin market, and since then, both USDC and DAI have moved closer to their dollar peg.
Source: CryptoVizArt on X
Crypto Market Reaction to the Bank Failure Storm
Bitcoin has emerged as an alternative to centralized monetary systems, particularly in a time when trust in bank deposits is waning. This is why investors of all levels are now turning to fiat-independent cryptocurrencies like Bitcoin and Ethereum, which are currently the most popular. Tighter access to US banks, following the US banks’ failure storm, seems to have hastened this shift towards cryptocurrencies.
According to a publication by coindesk, on March 23rd, the price of Bitcoin surged to almost $30,000, and Ethereum rose above $1,850 These events further highlight the increasing interest in and adoption of cryptocurrencies as a means of decentralized finance. Litecoin (LTC) saw a 12% increase in value and was trading at approximately $93. It was also reported that within 24 hours, traders had liquidated approximately $3 million worth of LTC short positions, causing the price to rise from around $83 the previous day, as per Coinglass data. Additionally, Aptos' native APT token, which is a Layer 1 blockchain, was also up by over 7% and was trading around $13.
Source: Coindesk.com
Prospects For the Crypto Industry in the Aftermath of the Bank Failure Storm
The bank failure storm appears to have had a positive impact on the prospects for the crypto industry. The erosion of confidence in stablecoins, particularly USDC, has resulted in traders turning to alternative cryptocurrencies like Bitcoin and Ethereum, which are seen as more decentralized and independent of traditional financial institutions. The surge in prices of Bitcoin and Ethereum following the bank failure storm highlights the increasing interest and adoption of cryptocurrencies as a means of decentralized finance.
Additionally, the fact that Tether, the world's largest stablecoin, remained stable during the crisis due to its lack of exposure to Silicon Valley Bank, may further enhance the credibility of stablecoins and their potential as a means of digital transactions. Overall, the bank failure storm may accelerate the shift towards cryptocurrencies and further strengthen their position in the financial market.
On the flip side, the bank failure storm could lead to increased crypto regulations, as governments and financial regulators may become more concerned about the stability of the financial system and the potential risks posed by decentralized cryptocurrencies. This is evident in the events that have played out between regulators and crypto firms in the US.
Paxful, a peer-to-peer cryptocurrency exchange, has announced its decision to suspend its marketplace due to the ongoing crypto downturn. The company's CEO, Ray Youssef, made this announcement on Tuesday April 4, 2023, stating that it is uncertain whether the marketplace will be reinstated. However, customers will still be able to access their funds through the Paxful Wallet, which will continue to operate.
Source - Anita Posch on X
Youssef also acknowledged the challenges faced by the company, including key staff departures, regulatory challenges, and a lawsuit brought against the CEO and the company by a Paxful co-founder. Youssef explained that compliance-related issues were particularly challenging, given that a quarter of the company’s staff were compliance personnel. The company is currently unable to operate in the US due to regulatory challenges and staffing constraints.
International Implications: A Discussion of How the Bank Failure Storm in the US Impacted Other Countries and the Broader International Financial System
According to BBC news on March 24, 2023, sharp declines in European banking shares have raised concerns that the fallout from the recent bank failures in the US may not be easily contained. The sell-off hit banks including Deutsche Bank, whose shares fell by more than 8%, Commerzbank and Societe Generale. The FTSE 100, DAX and CAC all saw sharp falls, while in the US, JP Morgan Chase and Morgan Stanley were among the banks to see shares fall.
Furthermore, the ongoing regulatory crackdown on cryptocurrencies in the United States has presented an opportunity for Hong Kong to establish itself as a new center for the crypto industry.
Hong Kong has traditionally been a preferred destination for high-profile crypto firms. However, due to concerns about crypto crackdowns in China and Hong Kong’s strict response to the Covid-19 pandemic, numerous firms have been exploring alternative locations like Singapore and Dubai.
In the current context, as Hong Kong resumes operations, it has embarked on attracting players in the crypto industry, especially since regulatory crackdowns are becoming increasingly stringent in the United States.
According to Ambre Soubiran, CEO of the Paris-based crypto asset data provider Kaiko, in an April 1, 2023, report by the Wall Street Journal, the government of Hong Kong is more receptive than other countries. Soubiran is of the opinion that the "center of gravity of crypto asset trading and investments will gravitate towards Hong Kong" due to the United States' stricter regulations on cryptocurrencies. "We want to establish a presence where our clients are," she further stated.
Conclusion: A Call to Proactive Regulation and the Security of Customer Fund
The recent US bank failure storm and its impact on the global financial market highlights the need for proactive regulation and increased security measures to protect customer funds. As more investors turn to cryptocurrencies as an alternative to traditional banking systems, it is crucial that the industry be held to the same high standards of transparency, accountability, and security as traditional finance.
This includes implementing measures to prevent bank failures from causing instability in the cryptocurrency market and ensuring that stablecoins are fully backed by reserves that can be easily audited. By taking proactive steps towards regulation and security, the cryptocurrency industry can build trust and confidence among investors, paving the way for long-term growth and stability.
