It is impossible that during the weekend you have not heard or read at least once about the collapse of the Silicon Valley Bankeither BLS. The entity was the protagonist of one of the most resounding bank panics of recent times, which particularly affected thousands of startups and venture capital funds, and which also had ramifications in the world of cryptocurrencies.
The scenario was so chaotic that in the United States there were fears of a contagion effect that would lead to the collapse of other banking institutions. To the point that the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) had to intervene to guarantee clients’ access to their money.
But what led SVB to pass within a few days from being considered one of the best American banks, at least according to Forbesto total disaster? We explain it below.
SVB, the bank of choice for startups
Silicon Valley Bank was a subsidiary of SVB Financial Group and had among his clients a large number of startups and venture capital funds. In fact, in recent years its deposits had grown considerably. From the $60 billion it reported in the first quarter of 2020, it jumped to nearly $200 billion in the first few months of 2022.
What did SVB do with a large part of the deposits entrusted to it by its clients? Invested in US government-backed Treasury bonds and mortgage securities. A measure that seemed safe on paper, but ended up backfiring. Because? Recent interest rate increases by the Federal Reserve to contain inflation led to these securities depreciating on the open market. So things, If the bank had to go out unexpectedly to get rid of them, the only way to sell them was at a loss.
To this was added the deceleration in the entry of new deposits, and the acceleration of the withdrawals of funds by its clients. In the case of startups, the latter was due to the fact that the current conditions were not ideal to go out and raise fresh capital, or to attempt a public sale offer. So spending the funds kept in the Silicon Valley Bank became a recurring practice for several of them.
However, the real chaos broke out last Wednesday. On that day, SVB surprised everyone by announcing that needed to raise $2.25 billion to break even. This, after selling a part of his portfolio of securities for 21,000 million dollars, with a loss of 1,800 million dollars.
The bank panic
The news that Silicon Valley Bank needed to raise funding terrified customers. Especially, because a few days before the US banking system had already suffered a major blow with the fall of Silvergate, one of the main banks pro-crypto from United States.
Driven by their own venture capital funds, a large number of startups they went out desperate to withdraw the money they kept in SVB accounts. According to a regulatory document, by the close on Thursday the entity’s clients had extracted 42,000 million dollars. In fact, the financial entity ended that day with a red of 958 million dollars. In simpler terms, the withdrawals were so brutal that the bank ran out of cash.
The institution tried to calm its clients through a statement sent by email, but it ended up having the opposite effect. On Friday, Silicon Valley Bank tried unsuccessfully to find a buyer, and ended up being shut down by regulatory authorities.
The California Department of Financial Protection and Innovation shut down SVB and the Federal Deposit Insurance Corporation (FDIC) took over. As soon as this happened, the FDIC announced that all customers with insured deposits —that is, those up to $250,000— would regain access to them starting Monday morning.
The problem was that most of the deposits made at Silicon Valley Bank they were not insured. The institution itself had reported that, by the end of 2022, the funds deposited in its US branches that exceeded the limit guaranteed by the FDIC exceeded 151,000 million dollars.
What would happen to them? Initially, the Federal Deposit Insurance Corporation indicated that those SVB clients whose funds were not insured would receive an “advance dividend” this week. While the recovery of the rest would be subject to what is obtained from the sale of the bank’s assets.
This caused even greater discomfort, especially in the startups They already gave up their money. Thus, businessmen and venture capital funds began to campaign on social networks so that the relevant government agencies they will carry out a salvage and allow Silicon Valley Bank customers to recover their funds.
The ‘total protection’ ad
It is estimated that more than 1,000 startups from YCombinator were affected by the SVB fiasco. many of which they could disappear in a matter of days if they did not recover access to the money blocked by the collapse of the bank. As recently as Sunday night, a joint statement from the Federal Reserve, the Treasury Department and the FDIC brought reassurance to Silicon Valley Bank clients.
The agencies reported that would take steps to provide “full protection to all depositors”. And they promised that all customers would regain access to their money starting today, Monday March 13.
How was this accomplished? Basically, the $250,000 collateral limit was removed to allow all startups and the rest of the clients withdraw their funds blocked in SVB. “No loss associated with the Silicon Valley Bank resolution will be borne by taxpayers,” they said.
What the US Federal Reserve and Treasury Department will do will be to advance the money to the depositorsand they will keep their own Treasury bonds as collateral.
Signature Bank, another bank that ended in collapse
Silicon Valley Bank was not the only US bank whose collapse made headlines in recent hours. In the same statement issued by the FED, Treasury and FDIC, the closure of Signature Bank was announcedone of the banks crypto-friendly most important in the United States.
According to the authorities, the decision was made to avoid a “contagion effect” from the banking crisis. As of December 31, 2022, Signature Bank had reported total assets of more than $110 billion. Of this amount, more than 88,000 million dollars corresponded to deposits.
Fearing something similar to what happened with Silvergate, the other major North American “crypto bank”, the authorities decided to intervene. As with SVB, all customer deposits will be fully availableremoving the $250,000 guarantee ceiling.
It is worth clarifying that in the case of both Silicon Valley Bank and Signature Bank, shareholders and “certain unsecured debt holders” will not be protected. That is to say, they will not take anything from the banks in liquidation. “Senior managers have also been removed. Any loss from the Deposit Insurance Fund to support uninsured depositors will be recovered through a special assessment of banks, as required by law,” the US authorities said.
SVB chaos put two stablecoins against the ropes
Beyond the more than 1,000 startups that were affected by the collapse of SVB, the ramifications to the crypto world were not long in coming. Saturday, USDCthe second stablecoin most important in the world lost parity with the US dollar.
This led to a large number of users panicking and trying to escape from said asset. The fear of something similar happening to UST and Luna, especially fueled from crypto-twitter, expanded in a matter of minutes. Keep in mind that USDC today is reference currency on centralized platforms, as well as in the world of decentralized finance (DeFi).
The problem was due to Circlethe company that is in charge of its development, had $3.3 billion locked up at SVB. Said amount represented little more than 8% of the funds used as collateral to maintain the peg with the dollar.
In this way, the aforementioned stablecoin it came to trade at only 87 cents on the dollar. But she was not the only one who was affected by the situation. ICDthe stablecoin developed by MakerDAO suffered exactly the same. Something that many may find striking, considering that it is a stablecoin decentralized. But the problem is that part of the reserves that are used to maintain parity with the dollar are in USDC.
The initial panic caused USDC to lose over $7 billion of market capitalization in the blink of an eye. This, due to the “escape” of the users of said stablecoin to other safer assets. However, the joint announcement by the Treasury, the Federal Reserve and the FDIC has managed to bring peace of mind. In fact, this morning, both Circle’s stablecoin and MakerDAO’s they were slowly regaining parity with the dollar.