How would the collapse of 3 major banks in US impact crypto market?
Over the last week, we’ve observed the collapse of three major banks in the United States – Silvergate, Silicon Valley, and Signature. However, what led to this occurrence, and is there a connection between their simultaneous decline? Let’s explore.
Why did Silvergate Bank collapse?
One of the major players in the crypto lending space, Silvergate Bank, experienced a significant setback in November last year when investors withdrew $8.1 billion in the aftermath of the FTX incident.
This triggered a series of negative consequences, including the sale of debt at a loss of $718 million.
In its most recent financial report, the bank reported staggering losses of $1 billion for Q4 and $949 million for the entire year of 2022, compared with $76 million profit it posted in 2021.
As a result of these developments, Silvergate Bank had a bad run when it failed to cater to further payment obligations.
It ultimately led the bank to liquidate its operations.
Why did Silicon Valley Bank collapse?
The success of Silicon Valley Bank was closely tied to the growth of technology startups in the United States.
With the outbreak of COVID-19, many of these companies saw an increase in demand for their services, resulting in a surge of deposits into the bank.
To manage these funds, SVB invested a significant portion in the US government bonds, generally considered low-risk investments. However, when the US Federal Reserve began raising interest rates in response to inflation, the price of the bonds that SVB held dropped significantly.
The bank decided to sell a portion of this bond portfolio at a loss.
However, it might have been a practical decision at the time, but in hindsight, we know it was a very wrong move.
Given that SVB is a publicly-listed company, this sale spooked investors.
The share price dropped by more than 65% in two days.
That created a ripple effect and spread fear among the depositors, who came rushing to withdraw their funds. It prompted a massive liquidity crisis, thereby leading to the collapse.
What happened to Signature Bank?
Following the collapse of SVB, Signature Bank, a US crypto lender, had its assets seized by regulators two days later in anticipation of possible collapse.
Will these three bank failures affect the depositors?
No. The three banks have promised to return the money to the depositors.
However, it might take some time for the process to take effect, as they need to sell their assets and pay back their depositors.
How will this affect the crypto market?
Silvergate and Signature were the primary banking institutions serving crypto companies, while Silicon Valley Bank had many crypto startups and venture capitalists as its clients. Since these were the most crypto-friendly banks, it would be a little difficult for startups and companies to get lending services.
Crypto liquidity is likely to take a hit in the short term but this is an opportunity for new innovation challenger banks to step up and take the place of SVB, Silvergate and Signature.
While the short-term effects of these events may create market volatility, in the long term they could encourage greater caution among other banks and provide regulators with an opportunity to offer more clarity regarding the crypto sector in terms of regulations to avoid such events.
By:ET
