Hamilton Mobley

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Silicon Valley Bank and Signature Bank Go Bust

Silicon Valley Bank went bust on Friday, March 10, 2023. On Sunday, Signature Bank was been shut down by regulators. They are the 2nd and 3rd largest bank failures in US history, respectively. This happened because the Federal Reserve has been raising interest rates for the past year, drying up the supply of affordable low interest rate loans. The only way for the depositors to be made whole is for the government to bail them out, using the Federal Reserve as the lender of last resort. Soon, everyone will want to be bailed out.

On March 10, Silicon Valley Bank Collapsed. New York based Signature Bank failed on Sunday.

Per Hugh Son, Rohan Goswami, and Jonathan Vanian writing for CNBC,[1]

“The episode is the latest fallout from the Federal Reserve’s actions to stem inflation with its most aggressive rate hiking campaign in four decades. The ramifications could be far-reaching, with concerns that startups may be unable to payemployees in coming days, venture investors may struggle to raise funds, and an already-battered sector could face a deeper malaise.

The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. It had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss, the bank said late Wednesday.

The sudden need for fresh capital, coming on the heels of the collapse of crypto-focused Silvergate bank, sparked another wave of deposit withdrawals Thursday as VCs instructed their portfolio companies to move funds, according to people with knowledge of the matter. The concern: a bank run at SVB could pose an existential threat to startups who couldn’t tap their deposits.”

Then Signature Bank went under on Sunday.

Per David Hollerith of Yahoo!Finance,[2]

“Signature becomes the third-largest bank to ever fail in the U.S., behind Silicon Valley Bank and Washington Mutual in 2008, if its assets haven't changed significantly since the end of 2022. Signature had $110 billion in assets as of Dec. 31, ranking 29th among U.S. banks. It had $88 billion in deposits as of that date, and approximately 89.7% were not insured by the Federal Deposit Insurance Corporation.

Signature served clients in the cryptocurrency world and had been trying to reduce its exposure. Like Silvergate Bank, another crypto-friendly bank that said last week it would voluntarily wind itself down, it suffered from a deposit outflow in the aftermath of the collapse of crypto exchange FTX. Deposits dropped 17% in the fourth quarter of 2022 as compared to the year-earlier period.”

Both banks had exposure to the cryptocurrency market. Crypto investors have been suffering through fraud and bankruptcy lately as their access to low interest rate loans have dried up because the Fed raised interest rates over the past year.[3]

Two days before SVB went bust, Silvergate Capital announced that they were shutting down. They were also a major speculator in cryptos.

Per Mackenzie Sigalos of CNBC,[4]

Silvergate Capital, a central lender to the crypto industry, said on Wednesday that it’s winding down operations and liquidating its bank. The stock plunged more than 36% in after-hours trading.

Silvergate has served as one of the two main banks for crypto companies, along with New York-based Signature Bank. Silvergate has just over $11 billion in assets, compared with over $114 billion at Signature. Bankrupt crypto exchange FTX was a major Silvergate customer.”

Bitcoin was created in 2009. Cryptos emerged in a world of low interest rate loans and easy money because the Fed had been printing money (digital dollars) and lowering world-wide interest rates (via the Federal Funds Rate) in response to the 2008 Great Recession. The Fed could do this because the dollar is the world’s reserve currency and they print it (the Treasury prints physical dollars). To combat the rising prices from all of the new money that they printed, the Fed raised the Federal Funds Rate in December 2016, drying up the supply of low interest rate loans. By 2019 there was a debt crisis (repo market), and in 2020 with the excuse of covid, the Fed reversed course and printed money to provide affordable, low interest rate loans. Then in February 2022, to combat rising prices, they again begin raising rates. Here we are again.[5]

Most depositors in SVB and Signature Bank have more money in the bank than the $250,000 limit protected by the Federal Deposit and Clearing Corporation (FDIC). These banks cater to the rich. Luckily for them, the Federal Reserve, the Treasury, and the FDIC issued a joint statement saying that they would protect most of the money.

They stated on March 12,[6]

“WASHINGTON, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13.  No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole.  As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. 

The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”

Soon, everyone will want a “free” bailout.[7]

Silicon Valley Bank went bust on Friday, March 10, 2023. On Sunday, Signature Bank was been shut down by regulators. They are the 2nd and 3rd largest bank failures in US history, respectively. This happened because the Federal Reserve (Fed) has been raising interest rates for the past year, drying up the supply of affordable low interest rate loans. The only way for the depositors to be made whole is for the government to bail them out, using the Federal Reserve as the lender of last resort. Soon, everyone will want to be bailed out.



[1]https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html

[2]https://finance.yahoo.com/news/regulators-seize-signature-bank-in-third-largest-us-bank-failure-231404695.html

[3]https://www.hamiltonmobley.com/blog/binance-fast-money-loses-swift

[4]https://www.cnbc.com/2023/03/08/silvergate-shutting-down-operations-and-liquidating-bank.html

[5]https://www.hamiltonmobley.com/blog/printing-money-lowers-interest-rates

[6]https://home.treasury.gov/news/press-releases/jy1337

[7]https://twitter.com/zerohedge/status/1634975594252505089