For all the attention given to recent failure Investigations of Silicon Valley Bank, Signature Bank, and First Republic Bank found it surprising as to exactly what caused the fastest bank run in U.S. history (SVB) and the subsequent collapse of Signature and First Republic Banks. Little focus on what should be done.
Yes, there have been bad bets on long-term US Treasuries and other bonds. Signs of poor risk managementand Less-than-complete vigilance by regulators.there is it was a tweet By tech influencers who are worried about money. But a little further back in the thread leads us to another purpose: cryptocurrency banking.
In 2014, silver gate Capital, a microfinance institution based in La Jolla, California, became the first crypto-friendly bank in the United States, providing the digital currency industry with an entry point into the regulated banking system. It has attracted more crypto customers with its 24/7 platform that allows money to move. At its peak, bank cryptocurrency deposits rose to $14 billion. Ninety-five percent are uninsured by the Federal Deposit Insurance Corporation (FDIC), increasing the likelihood that depositors will withdraw their funds at the first sign of trouble.
Building a business model around cryptocurrency customers who are not known for their strong operational controls, board oversight, and compliance with money laundering laws was risky. Some of the bank’s deposit customers have been investigated, fined, or closed. His FTX bankruptcy full of scams in November 2022 cause a domino effectexposed the weakness of Silvergate’s risk management practices.
FTX was one of Silvergate’s largest depositors, accounting for about $1 billion, or about 9% of the bank’s total deposits. Prior to filing for bankruptcy, FTX withdrew those deposits. destabilized silver gate And other depositors panicked and had their funds withdrawn. In the last quarter of 2022, a Silvergate customer removed 68%, or a staggering $12 billion of his deposit.
On March 8, 2022, Silvergate voluntarily closed its doors after the extent of depositor panic became public. The next day, SVB, with 94% of its deposits insured non-FDIC, some of which were cryptocurrency-based, was in trouble. In 10 hours he had $42 billion in deposits drained, equivalent to $1 million every second. The next day, deposit customers requested withdrawals of $100 billion. We are unable to meet this request, SVB seized by FDIC. The fatal event was the fastest bank run in US history.
The fastest bank run so far took weeks, not hours or days, for a major bank to fail. ( 2008 Washington Mutual bankruptcyIt remains the largest bank failure in U.S. history, taking nine days and withdrawing $16.7 billion from depositors. )
recently testimony Ahead of the Senate bank hearings, former SVB CEO Greg Becker said the collapse of Silvergate and social media was partly to blame for this deadly run.
next domino to fall
Two banks collapsed and the run-in caused by Silvergate intensified. Next up was Signature, a New York-based bank that has been actively embracing cryptocurrencies since 2018. Like Silvergate and SVB, over 90% of Signature’s deposits were covered by non-FDIC insurance. Of these deposits, 20% were related to the cryptocurrency industry. Based on deposits, Signature Bank is now America’s largest cryptocurrency bank. But on March 10, $20 billion was withdrawn in just two hours. Like the SVB, the Signature didn’t survive that weekend. taken over by banking regulators.
The bank run continued.First Republic Bank (Fed), another California-based financier was next. While not a crypto bank, it was prone to risk taking, including relying primarily on non-FDIC deposits (67%) to fund its lending expansion. Initially, a consortium of 11 U.S. banks provided $30 billion in emergency funding, giving the Fed temporary relief. But by April, when banks announced they had lost half of their deposits ($100 billion) in less than a month, they were closed and their assets sold.His Statement at the Senate Banking Hearing testimonyformer Republic CEO Michael Loeffler blamed SVB and Signature for the epidemic that spread and infected the wider financial system.
The risks of mixing cryptocurrencies and regulated banking systems
As the banking cryptocurrency ecosystem grew, it became intertwined with the very banking system it claimed to destroy. The rise of pseudo-cryptocurrency banks, such as Boston-based Circle, which accept deposits and generate digital stablecoins used to mimic the US dollar, also poses new risks. stablecoinis a kind of digital money market fund that acts as a bridge between cryptocurrencies and traditional banking and is currently held by millions of investors. Circle had $3.3 billion in uninsured deposits at risk when SVB collapsed. This caused a large sale of investors. Within hours, the value of Circle’s USDC stablecoin, the second largest in the world, plummeted. Circle’s “run on the run” has further shocked financial markets, proving that this new digital financial product can be nominally stable under market stress.
How a bank run works
The advent of instant wire transfer platforms and social media has accelerated the speed of bank runs. But while depositors no longer line up at bank tellers, the mechanics of bank failures are remarkably consistent. Deposits are the main source of funds that banks use to make loans and run their businesses. When large amounts of deposits are withdrawn, banks are forced to sell loans and other assets to secure liquidity. Such executions can cause distress losses.
Bank runs are uncommon and occur when depositors panic about losing money and withdraw their funds. The more depositors withdraw their funds, the more likely the bank will fail. No bank, no matter how strong, can survive if the trust of depositors is lost.
FDIC safety net
After 9,000 banks failed in the wake of the Wall Street Crash of 1929, FDIC insurance was created. Over the years, the guaranteed funds limit has increased from $2,500 to $250,000 per account. During the recent banking crisis, this restriction was temporarily lifted. FDIC insurance is the glue that makes our banking system work. This gives depositors peace of mind that their funds are safe, which in turn provides banks with stable and cheap funding. Banks that fall within these insurance limits have the most stable deposit bases.banks that are not playing with fire.
Some argued that the Silvergate infection would have been mitigated if cryptocurrency risk had been spread across more banks. But if more financial institutions had similarly fragile banking practices, the shock to the whole system would have been even greater. This is not pointless. While cryptocurrencies are still in a weakened state, the Circle stablecoin has recovered. The industry will not disappear.
If the crypto sector is left unchecked and unmonitored, it can adversely affect the financial health of banks, posing contagion risks to the larger and more regulated financial sector. This spring’s events prove that policymakers and regulators need to scrutinize how best to shield the risks of crypto banking.
Mark T. Williams is a student of the Finance Department at Boston University’s Questrom School of Business, a former Federal Reserve Bank examiner, and current President of the Boston Economic Club.
