The Silicon Valley Bank Collapse Shows Why the Current System Is Flawed. We Need a Plan B: Bitcoin.

By ssaurel | In Bitcoin We Trust | 11 Mar 2023

Silicon Valley Bank's bankruptcy is shaking Wall Street.

The big question on everyone's mind: is contagion to the financial system possible?

To answer that question, let's go back to what happened in the last few hours.

On Wednesday, March 8, 2023, Silvergate, which had been in trouble for some time since the FTX fiasco, announced that it would cease operations.

On Thursday, March 9, 2023, it was learned that Silicon Valley Bank was running out of cash. SVB's share price dropped by 60%.

On Friday, March 10, 2023, SVB was in bankruptcy, taken over by the FDIC.

A dark week for the banking world in America!

In the last hours, SVB tried to raise capital but failed. Then SVB tried to sell itself to a bigger bank, but without success. Now, the FDIC will try to save SVB's customers' assets.

The important thing to remember here is that many other banks are facing the same problem as SVB. Their bond portfolios are locked at a low rate. As depositors withdraw their money in droves, banks have to sell their bonds at huge losses to quickly recover the cash they are short.

When a bank like SVB faces a bank run, the bank's losses become massive.

SVB's problems started when the bank reported a $1.8B loss on the sale of its AFS (Available for Sale) bond portfolio. Rumors began to spread that SVB was in trouble with huge interest rate risk on its $91B portfolio.

A panic was created among SVB's clients with a bank run that started quickly. The mass withdrawals of customers fed the vicious circle SVB was in by continuing to increase its losses as the bank tried to cover the withdrawal demands of depositors.

SVB was the victim of a flawed and not fixable monetary and financial system. Clearly.

According to this system, SVB theoretically had the assets to cover customer deposits as required by law. The real problem here is that these assets were not liquid enough. Furthermore, when these assets are illiquid, can they be liquidated without causing massive losses?

The answer was no in the case of SVB and that is how it best gave rise to the second-largest bank failure in American history. The largest since Lehman Brothers in 2008!

With the Fed's rapid rate hike, other banks are facing the same liquidity problem as SVB.

Take the example of First Republic Bank whose stock lost up to 50% when SVB scared the banking market on March 9, 2023.

However, the word contagion does not seem to apply to bond portfolio issues. This outcome has little to do with SVB's relationship with other banks.

In fact, managing interest rate risk is an inherent challenge for every bank. SVB has failed. The fear that this induces could however impact other banks, but this would come from customers who would withdraw their deposits en masse from other commercial banks.

The risk is here: to see bank runs in series!

In the coming hours and days, investors and analysts will scrutinize all American banks to see which ones have the same potential weaknesses as SVB. First Republic Bank has been identified. Other bank names will emerge.

This purge will be deemed necessary by those who say that banks with bad business practices are the only ones at risk. According to these people, banks that responsibly manage their customers' deposits and investments are safe.

Many want to compare the failure of SVB to the failure of Lehman Brothers in 2008. Or to Bear Stearns in 2008.

Both of these banks were investment banks while SVB is a commercial bank. A commercial bank can have problems as the SVB case shows, but there is no comparison to the 31x leverage that Lehman Brothers had at the time of its collapse.

The situation is different, but the risk on commercial banks is very real with this rapid rise in the Fed's key rates. The fact that this increase is not going to stop quickly as Jerome Powell said recently will put more pressure on the US banks.

The recession that this will induce as well.

Silvergate and SVB chose to do business with FTX, but so did many other overvalued tech companies. The crash of these companies and the FTX fiasco is now being paid for. The problem is, as always, that it is the customers who will foot part of the bill for the mismanagement by these bankers.

The current banking system is flawed. Period. Is the current system fixable? Sorry, I don't think so!

For those who wonder if banks like Wells Fargo or JPMorgan are in danger, here is what Michael Barr, the Fed's vice chair for supervision, said in the last few hours:

"There are obviously large institutions that are also exposed to these risks too, but the exposure tends to be a very small part of their balance sheet. So even if they experience the same deposit outflows, they are more insulated."

For those who doubt that this system is headed for collapse, I think what is happening right now should give them pause. But above all, look for a plan B that is independent of the control of central banks and governments. A pure unit of wealth.

This plan B starts with a B... If you have found what I mean, you can use the comments to tell me.

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Entrepreneur / Developer / Blogger / Author.

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