There is often a perception that the events leading to the failure of a bank are complex and multi-faceted. However, the demise of both Silicon Valley Bank and Silvergate Bank can be traced back to two main factors: limited depositor diversification and excessive investment in long-dated assets such as US government bonds.
Rising interest rates have reduced the value of these bonds, and as the post-pandemic technology spending boom slowed, Silicon Valley Bank’s customers started withdrawing cash to stay afloat. Selling its bonds for much less than it paid for them alarmed many depositors and once withdrawals accelerated the end was nigh, as it was at Silvergate Bank where the collapse of FTX in November sparked depositor panic.
The reasons behind the demise of Signature Bank are more difficult to unpick and speak about to the extent that cryptos continue to divide the traditional banking community.
On the one hand, there is Barney Frank, the former Chairman of the House Financial Services Committee and a leading co-sponsor of the Dodd-Frank Act that was supposed to prevent financial crises.
Frank (who sat on the board of Signature Bank) told CNBC that it was shut down because regulators wanted to send a strong anti-crypto message and that “we became the poster boy because there was no insolvency based on the fundamentals.”
This is wild.
Barney Frank, the former congressman known for the Dodd-Frank Act, said regarding the collapse of the three bank failures:
The regulators “wanted to send a message to get people away from crypto. We were singled out to be the poster child for that message.”
— unusual_whales (@unusual_whales) March 15, 2023
The New York State Department of Financial Services quickly denied this, stating that its decision to close the bank had “nothing to do with crypto” and was rather prompted by a “significant crisis of confidence in the bank’s leadership” and concerns over its ability to do business in a safe and sound manner.
Who Will Be Next?
Speculation has been rife about which bank might be next to fall. First Republic Bank started reducing its exposure to crypto last year but still got caught up in the negative sentiment. The bank sent an email to its customers last week reassuring them that its capital levels were ‘significantly higher than the regulatory requirements for being considered well capitalised’ and that it had access to more than $60 billion of unused borrowing capacity.
The failures of…
