Breaking Down the Banking Meltdown

By: Sarah Ikalowych

Unless you are currently living under a rock (and in that case, kudos to you for using this blog to keep you up to speed), you know that the past week has seen the biggest banking implosion since the 2008 financial crisis. Just when we thought we were safely treading water from the most turbulent year yet for cryptocurrency, three major banks with ties to the field have shut their doors and left the entire banking industry questioning where they stand and what might be next.

The drama that has ensued is reminiscent of a WWE melee: confusing, chaotic, and requiring a slow-motion replay to understand what exactly is going on. Let’s jump into the ring and break down who is involved, how they got to this point, and where to go from here. Oh Yeah!

Who is Involved: The Triple S’s Take a Triple H-Style Beating

Let’s take a look at the banks currently involved, first.

Silvergate Capital had been an operational bank since 1988 when they opened as a California-based savings and loan bank, and they had a mission to carve a new path for traditional financial institutions. During the 2010s, they trained their eyes on the cryptocurrency sector, and started functioning as a lender to the crypto industry. It became one of the two most crypto-friendly banks with over $11 billion in assets at peak, operating second to Signature Bank. Regardless of the crypto writing being on the wall, many were shocked to see that Silvergate was the first of these banks to crumble, announcing its liquidation on Wednesday of last week.

Silicon Valley Bank, the next domino to fall, originally opened in California in 1983 and was widely known as the go-to bank for startups looking for bank services. The bank saw dynamic growth over recent years and even blossomed during the pandemic, when many tech companies were laser-focused on delivering new digital services to meet social distancing and stay-at-home order requirements. It saw peak assets at $220 billion this time last year, but panic ensued last week after the bank was hit hard by interest rate increases and needed to sell shares, leading to advisors telling startups to pull their assets ASAP. The bank was officially taken over by regulators on Friday.

Signature Bank was a New York-based bank founded in 2001 and then opened to the crypto industry in 2018, making it a newer institution to the traditional and decentralized finance games than the other players. However, it was leaps and bounds ahead of Silvergate in assets, with over $110 billion listed as of December 2022. The third to topple, Signature ceased operations on Sunday, pointing to the closing of the other two banks for the run on deposits that led to their takeover by regulators.

How Did They Get Here: Whatcha Gonna Do When FTX-a-Mania Runs Wild on You?

One major factor in the shuttering of each of these banks is the terrible year cryptocurrency has faced, since each of them had a hand in the crypto pot, and a great deal of the blame can be pointed in one specific direction – I’ll let you guess where.

Silvergate had deep ties to FTX, as it was a significant customer; SVB worked with a number of firms and funds who had their hands in digital assets and faced FTX exposure, and just last month, Signature Bank was slapped with a class-action lawsuit claiming it had full knowledge of FTX’s fraudulent operations.

Outside of their exposure to and involvement in the largest crypto fraud to date, these banks were actively fighting inflation, facing losses, experiencing layoffs, seeing decreased deposits, and trying to operate under heavy scrutiny from regulators – all enough alone to force a financial institution to shut its doors.

Where Do We Go from Here: The Commish Has Spoken

We can hope that the FDIC stepping in has quelled the meltdown and will prevent any further destruction, but there’s still plenty of questions left unanswered that affect us all. The expected rate increase from the Fed is being questioned, and startups and consumers alike are scrambling to find new banks to place deposits in and regulations put in place following the 2008 crisis are being revisited. The most prevalent question on everybody’s mind, however, is “Does this mean the banks are getting a bailout?”

On Monday, President Biden assured the country that not a dime of taxpayer money would be used to bail out these banks, unlike during the last crisis. He insisted that through the FDIC taking control of these banks, “no losses will be borne by the taxpayers”- and that all money needed to supplement any bank customers’ deposits would be paid by the fees that the banks pay into the deposit insurance fund. While the investors in these banks may be up a creek without a paddle, no customer of them will be affected, since “that’s how capitalism works”; for anyone who needed a civics and economics refresher.

Both the President and Treasury Secretary Yellen have remained adamant that the FDIC’s involvement does not at all constitute a “bailout”, and that no such thing will take place. Any other next steps from regulators or additional affected banks are still to be determined, but for now, at least, that’s the bottom line, ‘cause Stone Cold Janet Yellen said so.

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