Category: Banks
Update on the Current State of the Banking Industry
In March, several large U.S. banks with exposure to cryptocurrencies and technology start-ups collapsed, including Silvergate Bank (SI), Silicon Valley Bank (SVB) and Signature Bank of New York (SBNY). These and other banks experienced a surge in deposits from a combination of pandemic-era stimulus and the rise in cryptocurrency interest and cash inflows to technology start-ups from a hot IPO market in 2020 and 2021. For example, SVB’s deposits nearly doubled in 2021 from the prior year. Banks used these new deposits to make investments, which typically have low credit risk or risk of default, but high-interest rate risk. This includes the risk of interest rates rising, such as Treasury bonds or government-guaranteed mortgage-backed securities (MBS). This year, reduced interest in cryptocurrencies and the limited ability for tech start-ups to raise new capital led to deposit withdrawals, meaning that some banks were forced to tap their investment portfolios. However, due to the rise in interest rates in 2022, they had to realize capital losses on investment sales in order to raise capital and meet redemptions. As these losses became public knowledge, depositors began to lose confidence in the bank, leading to an acceleration of withdrawals, which quickly spiraled into a classic “bank run” at Silvergate, Silicon Valley Bank and Signature Bank of New York. What made these three banks somewhat unique – and particularly vulnerable – was the
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