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- 1 Silicon Valley bank has become the largest banking failure since 2008.
- 2 Various crypto whales have reportedly seen huge losses due to SVB collapse and USDC de-pegging.
The American banking system just witnessed the biggest collapse since 2008. Silvergate, Signature, and Silicon Valley Bank were shut down by US regulators within a week, rattling markets and investor sentiment. Interestingly, it is the first incident since 2008 after the collapse of Washington Mutual Bank which had assets worth $307 billion and deposits of $188 billion.
President Joe Biden spoke of new regulations for “Big Banks” since the collapse. He has also assured Americans that funds will be available whenever they need them. Officials from the relevant departments of the White House are working with regulators to set up new facilities and set up emergency funds for the Banks.
SVB was one the biggest startup-friendly banks with a deposit of $3.3 billion from Circle alone. A large decline in value is not a problem for banks unless they are forced to sell their assets. Let’s have a look at the collapse of Silicon Valley Bank and the depegging of USDC.
A Rat Race to Raise Rates
After more than a decade of easy economic policies and flooding the market with trillions of dollars, this collapse has now forced the country to notice flaws in the banking system. Developed economies have increased their policy interest rate by more than 200 points. The FDIC has reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of December 31. It has grown by 80X since the Feds started to raise rates. US commercial bank holdings have surged 53% to $4.5 trillion dollars as per Fed data.
Before Jumping into the collapse of SVB let’s look at how the banking system works in the USA.
A bank accepts deposits from customers and then lends a portion of those deposits to other who want to avail of loans; they also invest in various assets like bonds or securities. After 2008, rates were pretty low which helped startups and VCs to avail of cheap loans. It benefited banks like SVB where major Startups deposited their money.
Over the past few years, Fed started increasing rates which made borrowing less attractive. Raising the policy rate (the Federal Funds Rate) makes bond returns less attractive, which would have been a manageable issue. But this has led to decline in loans for startups which reduced the pace of deposits and even began withdrawing that money. It is interesting to note that SVB was the second bank to collapse in the past few years which was insured by FDIC.
Now let’s get back to the SVB finances: Silicon Valley Bank was established in 1983 in Santa Calara, California. It was considered as one of the most startup-friendly banks. It operates from 18 locations currently present in 2 states as per the FDIC. As of 2021, it claimed to the bank for half of the venture capital startups in the USA including Vox media and Circle.
Let’s have a look at their financials: SVB has 7095 employees on its payroll. It has total assets and liabilities worth around $209,026,000,000. As per the petition to Treasury Secretary Janet Yellen, there are more than 30,000 businesses that has more than $250,000 in deposits at SVB. FDIC insures deposits up to $250,000 meaning customers with amount less than this will get their money back. It might hurt the small business and startups which use to rely on the SVB. Many startups are rushing to get their money out of the bank. On March 8th, the bank had to sell $21 billion of securities to maintain liquidity with a massive loss of $1.8 billion. It would be interesting to see how this scenario unfolds in the future.
$43 Billion Panic: USDC Depegs
Silicon Valley Bank banks almost half of all US startups and Circle is one of them. Circle helps in the operations and backing of USDC. USDC has a market cap of $40.4 billion with assets worth approximately $43.5 billion. From that, $3.5 billion was with Silicon Valley Bank. On Friday, Circle halted the redemption of USDC as banks are not open on weekends and various Exchanges paused their USDC conversion facility. This deppeged USDC to a low of $0.85 triggering panic among investors. Curve finance trading volume reached record highs during the USDC depeg. Many liquidity pools were also badly affected as many of those contain DAI or USDC.
AAVE, the leading Decentralized Exchange (DEX) was forced to freeze their positions of various coins including USDC to contain the volatility.
Compound, a leading Decentralized Finance (DeFi) protocol was forced to disable USDC supply transactions.
Many pools were drained for huge amounts to leverage the de-pegging which was a huge amount. In the midst of the Chaos, many stablecoins including Frax and DAI were also depegged.
Circle has a good revenue-generating model which may fill any hole in its balance sheet, should one arise in the future. Circle should be able to cover the holes created by the Silicon Valley Bank collapse in a few months without much trouble.
Circle recently told their investors that their operations will be open with cross-river bank and that the $3.3 billion risk has been removed.
With these collapses, it is important to identify which stablecoins remained strong and never disappointed investors.
Is this another 2008 Crisis?
The answer to the above question is pretty unclear as we see major banks collapsing while economies are developing at reasonable rates. The crypto market was in panic mode amid the de-pegging of USDC. At the time of writing, USDC is currently near $0.9979 and is inching closer to its dollar Peg. People use stablecoins to safeguard their assets. However, this collapse has shown that Tether remains the King of stablecoins for retail as well as institutional investors. It may be a great time to rethink our economic system with banks functioning as its heart.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
