On February 9th, 2023, Silvergate Capital, a key player in the crypto economy, declared it was ceasing operations. Similarly, state regulatory officials closed down Silicon Valley Bank (SVB), a venture capital bank, on February 10th, 2023.
The clients of both banks are currently dealing with significant difficulties that have worsened due to the current economic climate. As expected, deposits have decreased, and cash withdrawals have increased, further worsening the impact of long-dated non-cash holdings of unconventional banks.
The Collapse of Silvergate Capital
Silvergate Capital is one of the financial institutions that has suffered the trickle-down effect of the closure of Sam Bankman-Fried’s FTX exchange. Towards the end of the third quarter of 2022, the bank had about $13.3 billion in deposits, $1.9 billion in cash, and $11.4 billion in investment securities. By all standards, the bank was fairing reasonably well.
However, the bank's financial records took a different turn in the last quarter of the year 2022. Its deposits decreased to $6.3 billion, over 50% of its deposits in the previous quarter. This compelled the bank to raise $5.7 billion by liquidating its securities portfolio, which unfortunately had declined in value due to fluctuating interest rates.
The bank's equity capital was also affected. According to the company's filing reports, its equity capital had fallen to $571.8 million. The bank's "leverage ratio" decreased from 10.5% in the third quarter of 2022 to 5.1% in the fourth quarter. The company was only able to stay above bankruptcy by its capital reserve.
In contrast to the $6.3 billion deposits, Silvergate Bank had $4.5 billion in cash and unsold securities by the end of 2022. According to the regulatory documents, the bank also received advances from the Federal Home Loan Bank of San Francisco totaling $4.3 billion. With these financial records, the bank's executives appeared better positioned to manage the company's affairs in 2023.
On a conference call with investors on January 17th, 2023, Silvergate Capital CEO Alan Lane stated that the business first employed wholesale finance to address the outflows. He further explained that the bank had sold its debt instruments in an attempt to retain its highly liquid balance sheet and tolerate persistent lower deposit levels.
Alan J Lane
Chief Executive Officer, Silvergate Bank
During the conference call, Lane expressed optimism that Silvergate will "return to profitability" in the second quarter of 2023. He assured investors the bank is "dedicated to maintaining a highly liquid balance sheet with little credit exposure and a solid capital position."
The CEO also informed investors that the bank's executives planned to lessen the company's reliance on wholesale finance. This would ultimately be important in March 2023.
However, on March 1st, 2023, Silvergate Capital announced that it had been compelled to speed up the sale of assets to pay back its loan from the Federal Home Loan Bank of San Francisco. The bank also disclosed that it had incurred significant losses, which had caused it to fall below its "well capitalized" mark.
Following its filing on March 1st, the bank's stock price crashed, and major investors indicated immediate fund withdrawals. This led to several speculations that the FDIC may take over the bank.
On March 8th, 2023, Silvergate Capital announced its intention to return all investor and client deposits. The bank promised to "voluntarily dissolve the bank in an orderly manner." But, there was no mention of an FDIC involvement in this announcement.
What Happened to Silicon Valley Bank?
With around $209 billion in assets, Santa Clara-based Silicon Valley Bank (SVB) was the 16th-largest bank in the United States in 2022. With such a reputable position in the financial market, the recent events at SVB were utterly unprecedented.
The fluctuating interest rate was the first challenge faced by the bank. Several SVB clients began withdrawing their funds as increasing interest rates forced the market for initial public offerings of many companies to close. It also increased the cost of private financing.
On March 7th, 2023, SVB announced its plan to sell $2.25 billion common equity. The bank also mentioned its preference for convertible shares to cover the financing shortfall of selling a $21 billion bond portfolio.
By Friday, March 10th, 2023, the SVB stock price collapsed, making it impossible for the bank to obtain funds. According to insiders, the bank considered alternative options to raise funds, including selling the bank.
The California regulators caught wind of the bank's plan to sell as it immediately ordered the Federal Deposit Insurance Corporation (FDIC) to take over the bank's operations. The bank reportedly lost $1.8 billion on Treasury bonds as the Fed rate hikes sabotaged its value.
According to the FDIC, all the bank's branches reopened on March 13th to allow insured depositors access to their funds. However, only 11% of the bank's $175 billion in deposits are covered by insurance, so it's still unclear what will happen to uninsured investors.
Furthermore, there have been insider reports that the FDIC is currently working on a merger between SVB and other reputable financial institutions. The credit rating organization S&P Global Ratings has mentioned that due to its liabilities, SVB Finance, SVB's parent company, will likely file for bankruptcy.
Being a key player in the financial market, many of its clients are worried about the safety of their funds. To ease its clients' anxiety, SVB Financial CEO Greg Becker acknowledged the company's challenges in a video he released on Friday, March 10th, 2023. He assured clients of the company's effort to ensure that they all get their entitlement.
What These Bank Failures Mean for the Financial Market
These financial institutions' recent failure is proof of the market fragility as the U.S. Federal Reserve and other central banks fight inflation by ending the age of "easy money." In the second week of March alone, U.S. and European banks lost over $100 and $50 billion in stock market value, respectively.
Although many banks have issued public statements to ease investors' concerns, some analysts predict that the financial sector will still experience substantial financial losses. According to the head of Whalen Global Advisers, Christopher Whalen, "There might be a carnage this week which will hit every single bank, especially the smaller ones."
In response to the recent incidents, the U.S. government has assured investors their money is secure.
On Friday, March 10th, 2023, Treasury Secretary Janet Yellen met with bank regulators and voiced "complete confidence" in their capacity to address the situation. The White House has advised investors to remain calm and allow the financial regulators to do their job.
How Recent Bank Crisis Affect Forex Traders
The price of equities in Europe, the United States, and Asia has been impacted by the recent financial crisis in the banking sector. A ripple effect of this is the shifted focus from Bonds. The banking crisis has significantly influenced the purchase and value of bonds since the start of the week.
Futures markets polls suggest that traders expect the Fed to raise rates by 25 basis points (bp) on March 22nd with a 65% probability and to keep rates at 35%. With these statistics, the US dollar index increase by 0.3% on Tuesday, March 14th, 2023, was anticipated.
This week's banking crises did not spare major financial market denominations. The British pound increased by 1.22% on Monday, March 13th, 2023, but fell by 0.28% on Tuesday, March 14th, 2023, to $1.215.
The dollar also fell despite being a secure asset. On Monday, March 13th, 2023, the US dollar fell by 1.04% against the safe-haven currency; however, on Tuesday, March 14th, 2023, it rose by 0.17% to 0.914 Swiss francs. The Australian dollar also decreased by 0.11% to $0.666.
In a bid to save funds, more investors are beginning to consider safe assets. There has also been increased consideration for investments with high interest rates. Judging by the recent bank closures, fund safety is the best thing investors should look out for before purchasing any financial market commodity or investment option.
Final Thoughts
Innovative banking systems have been instrumental to the growth of the financial market network. This network has appeared impeccable for several years, earning the confidence of new investors in the financial market.
However, recent bank closures have seemingly destroyed the notion of an impeccable banking system. Therefore, it is no surprise that there have been more withdrawals than deposits, accompanied by a general decline in trading activities. Sadly, financial market analysts have hinted that the worst is yet to come.
With the current global inflation rates and an impending economic crisis, the total outcome of recent financial market events is uncertain. The mantle is now on governments and regulatory bodies to take charge of the market and ensure that banks and investors overcome these difficult times.
