The collapse of SVB and Signature Bank have raised questions about the economy, the banking system, cryptocurrency and how banks should respond.
This week, the banking world was featured on the mainstream news in a big way, when reports came out that Silicon Valley Bank, the 16th largest bank in the U.S. was in freefall. Not long after, Signature Bank underwent the same fate, making this the third largest banking collapse in U.S. history.
As with events like this, there are a lot of uncertainties and a great deal of misinformation floating around about how this occurred and what it means for financial institutions and the U.S. economy as a whole.
Setting the stage
Silicon Valley Bank is well known for being a big investor in the technology sector, so when COVID-19 hit the world in 2020, there was a massive boom for tech companies and digital startups, according to a report by The Guardian.
As a result, these startups and technology companies began to deposit a large amount of cash into SVB bank, which was then able to use the deposits to invest, particularly in U.S. government bonds, many of which were backed by mortgages.
However, in recent months, the Federal Reserve began to hike interest rates to combat inflation, which caused government bonds to fail. Then, the situation became worse when tech companies began to withdraw their deposits due to uncertain economic conditions.
SVB was left in a major hole, as it didn’t have enough cash to support these withdrawals, so it began to sell bonds at a loss and then announced on March 8 that it needed to raise $1.75 billion.
Depositors then panicked and rushed to the bank to get their money, withdrawing a staggering $42 billion, which left SVB with a negative cash balance of $958 million.
That’s when the U.S. government stepped in, taking control of the bank on March 10 to secure deposits.
What about Signature Bank?
Signature Bank was also involved in the technology industry, particularly cryptocurrency, as it had $16.5 billion in deposits from digital asset related customers. The bank held more than $110 billion in assets, according to a report by AP News.
But the bank got caught in the crossfires of the SVB freefall as depositors began to flood in and withdrew more than $10 billion in deposits, prompting the government to take over this bank as well.
However, some are suggesting the move by the government had an entirely different purpose than simply protecting the banking system.
Barney Frank, former director of Signature Bank and former U.S. representative, who authored the Frank-Dodd act during the 2008 financial crisis, believes the government seized Signature Bank to send a message.
“This was just a way to tell people, ‘We don’t want you dealing with crypto,'” Frank told the AP.
Frank emphasized the withdrawal situation was under control on March 12, but the government stepped in anyway. He expects Signature Bank will be sold eventually.
“I believe they’re going to get a very good price,” Frank told the news outlet. “Proof that it was not a bank problem.”
The government have put both SVB and Signature Bank under the Federal Deposit Insurance Company, which said it will secure deposits for everyone, even above the $250,000 mark.
So what does this mean?
While some have suggested this could be a repeat of 2008, there are differences between then and now. First, in 2008, the mortgage-backed securities were very challenging to value, whereas the bonds assets that triggered this issue with SVB are much easier to both value and sell.
Second, the government stepped in early to prevent a crisis, unlike in 2008, according to a CNN report.
However, shares of banks did fall following these announcements, which can impact the economy negatively.
This has also raised questions about whether the Feds should reverse its policy of raising interest rates. However, the Feds likely won’t back down as, “risking a loss in the battle against inflation is not something Fed Chair Powell wants to do,” Greogy Daco, chief economist, EY, told CNN.
What about crypto?
While the U.S. government may have been trying to send a message about cryptocurrency, customers didn’t get the message.
In fact, Nigel Green, CEO and founder of deVere Group, believes this could be a “springboard event” for bitcoin as investors turn to alternatives such as cryptocurrency.
“Bitcoin is up as much as 20% during a historic banking crisis,” Green said in a press release. “It’s acting as a safe haven asset as the collapse of tech-focused Silicon Valley Bank sparks fears across Wall Street of contagion in the banking system which many say was being crippled by a relentless agenda of interest rate rises.”
Green believes the SVB rescue package acts as a form of quantitative easing, which “increases the supply of the dollar in circulation. This can lead to a decrease in the value of the U.S. currency relative to other currencies, as the increased supply of currency can reduce its purchasing power. Inevitably, this pushes investors to look for alternatives, such as bitcoin which has a limited supply.”
What should banks do?
As a result of all of this, banks have begun a variety of campaigns emphasizing their solvency, safety, FDIC insurance and other features as a way to assuage customer fears.
EJ Kritz, EVP of apc, a customer and employee experience consulting firm, said in a LinkedIn post that banks were doing this to give, “customers a sort of security blanket that they think they need.”
However, Kritz thinks banks may be making a mistake since, “it’s not about whether banks can get their customers to trust you today. It’s about whether they trusted you before SVB. Did they trust you last week? If they didn’t, no amount of marketing can take you back in time and retroactively gain customer trust.”
Kritz emphasized banks shouldn’t leave their customers, “to whither on the vine,” but instead should actively communicate with customers by training their employees to do so and by utilizing tools such as surveys, key performance indicators, problem resolutions tools and more.
He also pointed out banks are not a well beloved industry and mass communication doesn’t work. Instead, banks need to listen to their customers to meet their needs during troubling times.
“Stop posting and start listening,” Kritz wrote.
Bradley Cooper is the editor of ATM Marketplace and was previously the editor of Digital Signage Today. His background is in information technology, advertising, and writing.