💥 Another Financial Crisis on the Horizon: Time for BTC to Shine? ✨
Silicon Valley Bank experienced a catastrophic collapse, resulting in the second-largest bank failure in the history of the United States.
What Happened?
Silicon Valley Bank, the 16th largest bank in the US with $209 billion in assets, collapsed after a run on deposits doomed its plans to raise capital. The Federal Deposit Insurance Corp has taken control of the bank via a new entity, the Deposit Insurance National Bank of Santa Clara, and all deposits have been transferred. Insured depositors will have access to their funds by Monday morning. Bank stocks, including First Republic Bank, are plunging, with some halted for volatility, amid concerns over banks with a similar profile to SVB.
SVB Financial Group's fallout serves as a stark reminder of counterparty risks.
How Did It Happen?
Silicon Valley Bank bought tens of billions of dollars of seemingly safe assets during the pandemic, but they didn't expect interest rates to rise so quickly.
As a result, the value of these assets dropped, and SVB had unrealized losses on its securities portfolio. To make matters worse, deposit inflows turned to outflows as their clients burned cash, making it more expensive for SVB to attract new deposits.
This all came to a head when SVB announced that they had to sell a large chunk of their securities at a loss to reset their interest earnings at higher yields. The announcement caused their stock to plummet, making it even harder for the bank to raise capital.
Venture-capital firms advised their portfolio companies to withdraw deposits from SVB, further accelerating the bank's outflows. As a result, the FDIC has had to step in to ensure customers have access to their insured deposits, but uninsured depositors may face some losses.
The Domino Effect of Unrealized Losses
Unrealized losses can have a domino effect on banks, affecting their ability to raise capital, their stock prices, and their ability to attract deposits. This domino effect can also extend beyond the bank to affect its customers, as seen with SVB's venture-capital clients who were advised to withdraw their deposits.
But the fallout of SVB goes beyond just one bank. Many other banks are also facing unrealized losses in their securities portfolios due to the impact of higher rates.
This situation raises questions about which banks misjudged the match between the cost and lifespan of their deposits and the yield and duration of their assets. In other words: who did proper risk management?
What Will the Fed Do?
The Federal Reserve is in a difficult position now as it tries to balance the need to fight inflation with the potential fallout from banks' unrealized losses on their securities portfolios. Lowering interest rates could help ease the pressure on banks and allow them to recover some of their unrealized losses. However, doing so could also increase inflation, which is already a major concern for the Fed.
So, if the Fed lowers interest rates to help banks with their unrealized losses, it could end up worsening the inflation problem. This would make it even harder for banks to attract new deposits and fund new lending, creating a vicious cycle of lower profits and lower growth.
System at Risk? Or Systemic Risks?
The current situation with banks facing unrealized losses on their securities portfolios, and the difficult position the Fed is in trying to balance the needs of banks with the risk of inflation, raises concerns about the stability of our financial system.
Some critics (myself included) have long argued that the current economic system is essentially a Ponzi scheme, where banks and investors rely on the continuous growth of the economy to pay off debts and generate profits. This system works as long as the economy continues to grow, but it can quickly unravel if growth stalls or declines.
The fallout of SVB Financial Group and the potential ripple effects on other banks and the economy as a whole, highlights the interconnectedness of our financial system and the risks associated with relying on continuous growth. If the system is indeed a Ponzi scheme, then this could be the moment when it finally explodes.
The Rise of Crypto
Bitcoin was born after the 2008 financial crisis. In case you don’t remember, the fallout of Lehman Brothers…
With another financial crisis on the horizon, will this be the moment in which Bitcoin will finally thrive?
Juan Aranovich is an economist from Buenos Aires, Argentina. He works as a research analyst for Sino Global Capital and helps produce Laura Shin’s Unchained.
Contact me on Twitter.