One of the oldest tricks to cause a bank failure miserably is bank run. This is exactly what Silicon Valley Bank and Signature Bank had encountered.
First of all, Silicon Valley Bank, aka SVB, was a well-known tech bank favored by tech sector startups. Not only that, it’s also one of the biggest lender banks in America.
SVB used depositors’ funds to buy bonds for sustainable profits, like any other normal bank would operate. Normally speaking, a bank brought the assets for interests as it intended to hold on for a long time, so there wasn’t any problem with it.
But the harsh blow on tech stocks last year was a fist to the stomach for tech sector. Tech start-ups dried up their sleeves and still needed more cash to stop the bleeding, so they had to touch on their existing funds in the bank.
Meanwhile, the interest rate was hiking up meant if SVB sold the bonds they held, they exposed themselves to a huge loss due to its already market value decline + the loss on principal and remaining interests payment before its term ended. SVB was backed by billions of dollars worth of bonds at that time.
Now, when the withdrawal amounts required you to sell the bonds so you can then cover the amounts requested from your depositors that’s where the bank run started to form.
This is exactly what SVB did. They sold the bonds at a significant loss to cover demands and their portfolio didn’t look any good to depositors and financial watchdogs. SVB tried to rise the needed capital to ensure everything was fine but no one was willing to help.
However, isn't bank safe? why bank run? The American bank was supposedly protected by the amazing amercian financial shield right?
In America's financial setting, The Federal Deposit Insurance Corporation (FDIC) insures deposits only up to $250,000.
When you deposited more than 250,000 USD, you too will start worrying and withdraw your money quicker than you would have if only placed 20 USD in that same bank. The customer base of SVB was largely tech companies. At least 48 billions dollars were requested to date.
Circle, Issuer of USDC, was among other depositors to request a withdrawal from Silicon Valley Bank days ago. That’s where a normal crypto trader felt the cold slap of wave as the market suddenly became a blood stunk ground, followed by USDC depegged for a remarkable long time, even got below 0.90 at one point.
A lot of panicking indeed for the rumor of USDC insolvency. Heard a story of a trader who sold his ,worth of 2 millions, LP tokens 3CRV (DAI/USDC/USDT) into 0.05USDT at KyberSwap because he forgot to double-check his slippage setting that wasn't properly set up. The bot took a huge profit and swapped exactly what his "method" asked for. Poor soul.
Anyways, not long after that, Signature Bank is shut by the regulators in New York, citing that keeping it open could threaten the financial system’s stability. But how did this happen too?
Signature Bank was like an unfortunate victim who get rippled by the wave of SVB blow. But this ripple straight-up tore them apart.
Due to the smaller size of the bank and having a narrower base of customers, when the bank run strapped on, they couldn’t handle the speed.
It all goes back to when Signature Bank successfully became one of the few banks in America to welcome cryptocurrency deposits, right before the heavy sinking market last year.
Then, when customers heard the news of SVB they started to panic. Some called on the bank and asked if their funds were safe, while others requested immediate withdrawals.
What’s next? You guessed it, NY regulators had to step in to halt the business officially so the negative effect didn't keep continuously rolling out.
Now, the good news is, The FDIC says they’re going to tank up all of these messes, ensuring every penny you have in either Silicon Valley Bank or Signature Bank is safe. This is a bold and angelic move. They certainly foresee what would be coming if they don’t stop the ripple.
While the people who invested directly in SVB are gonna get a clean wipe out, depositors can have a reason to grab a coffee with a happier face in the morning.
Well, is Bank really too big to fail? No. But the government will very likely help clean up the mess. But how many times can Uncle Sam comes in and rescue? Who knows? As the catchphrase says, not your key, not your money!
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