Bank runs and the collapse of the tech banks

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Bank runs and the collapse of the tech banks

16 March 2023 Amega

March started off with a heavy toll on tech banks, as we witnessed the collapse of 3 giants in the sector, Silicon Valley Bank, Silvergate, and Signature bank. The culprit was mainly a bank run, which was able to bring down two of the most crypto-friendly banks and the biggest tech-startup bank within less than a week!

A “bank run” happens when a large number of a bank’s clients withdraw their deposits at the same time due to a fear of the bank’s affluence. In some extreme cases, the bank’s reserve may not hold enough equity to cover the withdrawals, leading to a collapse.

Silicon Valley Bank (SVB) is a bank favored by tech upstart companies. It once held billions of dollars in deposits in spite of having less than two dozen branches and catered to venture capitalists, tech firms, and specific types of startups. Many of its clients were crypto startups and VCs.

On Friday, March 10th, SVB was shut down by bank regulators after a swift and sudden collapse caused by a bank run, making this the second-largest bank failure in the history of the United States.

More than 42 billion USD were withdrawn by investors, who had panicked over Wednesday’s announcement that SVB needed to raise at least 2.25 billion USD in order to support its balance sheet.

Though SVB had revealed it was in trouble just two days before its eventual collapse, it put up a fight to recover, first by selling shares and then by trying to sell itself. This gamble backfired, as investors became suspicious and refused to touch the deal even with a ten-foot pole, putting the final nail in the SVB coffin.

On the other hand, Silvergate and Signature, the two most popular crypto company banks, faced the same fate as they were also unable to escape the deadly wrath of the bank run. Because of the failure of these three crypto-banking companies, the stablecoin market rippled over the weekend.

By Sunday night, cryptocurrencies were rallying again, and stablecoins had regained their pegs as the feds stepped in to put a backstop on deposits at Signature and SVB. The federal government also guaranteed all deposits for SVB and signature, which contributed to the crypto market rally on Sunday. However, in spite of that, the closure of the crypto banking trifecta has created instability in the stablecoin market, or should we say, not-so-stable coin instead?

Needless to say, as far as interest rates go, this huge banking failure will definitely throw the proverbial wrench in the works.

The Federal Reserve has been valiantly battling inflation by small yet stable increases in interest rates over the past few months, but while that battle still rages, now they have to deal with a new front: resolving the financial stability crisis caused by the closure of the tech banks. Needless to say, we expect to see sharper increases in interest rates in the upcoming months.

In a recent announcement on March 12, the FED board announced additional funding to be made available for depository institutions to help assure banks have the ability to meet the needs of all their depositors.

While some say that the FED is fighting an uphill battle they cannot possibly win, they seem determined to go down swinging, whatever the cost.

By the Amega Geek.


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