First Mover Asia: Silicon Valley Bank Failure Highlights Small Banks’ Vulnerability; Bitcoin Soars Past $22.5K

Since September 2021 the growth in cash assets in small bank balance sheets has turned negative.

AccessTimeIconMar 13, 2023 at 1:52 a.m. UTC
Updated Mar 13, 2023 at 5:48 p.m. UTC
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Good morning. Here’s what’s happening:

Prices: Bitcoin surged above $22.5K after federal regulators said they'd cover failed SVB's customer deposits; ether and other altcoins also revive.

Insights: Lurking behind Silicon Valley Bank failure is the real sick man of American finance: small banks.


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Investors Buoyed by Regulators' Statement Send Cryptos Higher

After a nerve-wracking Thursday and Friday, crypto investors took heart over the weekend from a decision by U.S. regulators to restore all depositors at failed Silicon Valley Bank (SIVB) in full, and an announcement by fintech Circle to cover any of its stablecoin USDC reserves.

Bitcoin was recently trading at $22,482, up more than 9.3% over the past 24 hours. The largest cryptocurrency by market value had plunged below $20,000 early Friday (UTC) as SVB customers withdrew their money en masse before the California Department of Financial Protection and Innovation shuttered the institution, a central player in the world's technology sector. SVB's failure is the second-largest in U.S. history.

In a joint statement on Sunday, U.S. Treasury Secretary Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell and FDIC Chairman Martin J. Gruenberg, said that after weighing FDIC and Federal Reserve recommendations and consulting with U.S. President Joe Biden, Yellen had "approved actions enabling the FDIC to complete actions in a manner that fully protects all depositors" at SVB.

“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” the statement read.

Mark Connors, head of research at crypto asset manager 3iQ, called the agencies' action "risk asset friendly at first blush" in a weekly report, although he noted warily, "Too many moving parts and M2 [monetary aggregate of currency and coins, savings deposits and shares in mutual money market funds] STILL contracting."

But Connors also added: "The Fed continues to extend their control on markets. What they announced this evening is the equivalent of guaranteeing overnight bank deposits in 2008."

Ether also regained ground to change hands at $1,614, up 9.6% from Saturday, same time. Other major cryptocurrencies that were hard-stricken last week as the impact on the crypto industry from SVB's collapse became apparent also rebounded over the weekend, with their main surge coming on Sunday. APT, the token of layer 1 protocol Aptos, and ADA, the native crypto of Ethereum rival Cardano, were up more than 13% and 11%, respectively. The CoinDesk Market Index, a measure of overall market performance, was down almost 10%.

On Saturday, payments technology company Circle Internet Financial said it would “cover any shortfall” in the assets backing its stablecoin USDC in the event it does not receive the entirety of a $3.3 billion cash reserve it was holding at Silicon Valley Bank. In a blog post, Circle said it “will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.” The value of the stablecoin fell as low as 88 cents before the announcement, but was currently trading above 99 cents.

U.S. stocks were swept up in banking sector worries, with the tech-heavy Nasdaq and S&P 500 declining 1.8% and 1.4%, respectively. The S&P finished down 5% for the week, its worst weekly performance since September 2022. As trading opened in Asia, the Nikkei 225 and Taiwan TSEC 50 Index were down slightly.

3iQ's Connors wrote that long-term the regulatory action to safeguard customers' assets would continue a "game of regulatory whack-a-mole" leading to, among other affects, a continued consolidation of the banking industry and the acceleration of stablecoin regulation.

"Outcome TBD," Connors wrote.

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SIVB Collapse Shows Why Small Banks Are Vulnerable

Silicon Valley Bank (SIVB) has been shuttered by state regulators. The Federal Deposit Insurance Corporation (FDIC) is racing to ensure that as much money as possible is available to SVB clients when the market opens Monday.

Late last week, Silvergate Bank, a major fiat on- and off-ramp for the crypto market, announced it was engaging in voluntary liquidation and shutting down, creating market panic. Its chief competitor, Signature, was seized by New York regulators over the weekend.

While SVB serviced some crypto companies, it didn’t service exchanges like Silvergate or Signature.

The Federal Reserve defines SVB as a large bank (these institutions have over $50 billion in deposits), and Silvergate as a small bank. Some have said should the FDIC not act decisively on Monday, contagion will spread throughout the broader banking sector. Already runs are beginning on First Republic Bank and other regional players.

Fundamentally, this crisis isn’t about crypto. The performance of tech companies – considered a risky asset – in a high-interest rate environment played a part, but it wasn’t everything either.

It’s about how small banks fared during stimulus-heavy COVID-19. These small banks aren’t as well known as SVB but, like Silvergate, specialize in serving an industry or niche.

They are also the ones that power fintechs. Cross River Bank (assets $9.9 billion) is the financial plumbing behind Coinbase, Stripe and Affirm. Evolve Bank & Trust (assets $1.3 billion) is the bank behind Wise and Dave.

These small banks like the arrangement because it diversifies their client base away from the usual local businesses that bank with small, regional institutions.

Tech startups, which move fast and break things, prefer to use small banks rather than traditional big banks. There’s a belief that they understand each other, and would get a more personalized, attentive experience rather than having an account with one of America’s largest banks. But in turn, this means that these small banks – which power fintechs – are overly exposed to the tech sector.

Covid, the curve and small banks

In 2020, small banks saw a massive influx of cash assets onto their balance sheets partly because of fiscal stimulus and the Fed’s asset purchases, which usually are geared toward an industry niche. As COVID-19’s impact on the economy wore off, cash supply turned into loans. Since September 2021 the growth in cash assets on small bank balance sheets has turned negative.

(Board of Governors/Federal Reserve)
(Board of Governors/Federal Reserve)

Throughout 2022, small bank lending increased while growth in cash assets stayed negative.

“Banks are now sitting with reserves pretty much at their lowest comfort level – especially small banks,” TS Lombard economist Steven Blitz wrote in a February note. “[Small banks] are more aggressive in lending and in borrowing short-term liabilities to fund themselves.”

Given the size of these institutions, and the lack of cash on hand compared to larger banks, Blitz writes that their borrowing was more aggressive. In addition, their small size meant they didn’t have the same level of regulation as their larger counterparts.

Fitz explains that post-COVID borrowings included advances from Federal Home Loan Banks (FHLB), designed to provide stop-gap liquidity, or from the Fed’s discount window, usually reserved for emergencies.

“Small banks, many of which are private and therefore have no shareholder concerns regarding the optics of borrowing from the discount window, have consequently shifted to using the Fed’s discount window facility,” Blitz wrote.

Both Silvergate and SVB had large advances from FHLBs on the balance sheet.

In the case of Silvergate, it ended 2022 with $4.3 billion of FHLB money on the balance sheet. This figure increased dramatically from the $700 million it had at the end of September 2022 because it needed to support its cash position in the face of rapid withdrawals post-FTX crypto exchange collapse. Days before its collapse, it said the loans were fully repaid – further depleting its balance sheet.

Withstanding spikes in the cost of borrowing

Lending long and borrowing short has been the model for banks since the beginning of time, but an inverted yield curve contradicts this.

An inverted yield curve occurs when short-term interest rates exceed long-term rates – an anomaly because lending money for the long term should fetch a higher interest rate for the lender.

At press time, the two-year Treasury note yielded a whole percentage point more than the 10-year note. The two-year yield has increased by 300 basis points to 4.82% in 12 months.

The dramatic increase in the cost of borrowing for these banks makes their lives difficult, coupled with a very tech-specific deposit flight as investors prefer high-yield short-term bonds over risky tech and crypto.

Startups aren’t raising new money given this environment and burning what they have to stay afloat.

(Silicon Valley Bank)
(Silicon Valley Bank)

Silicon Valley Bank identified this as a problem in its first-quarter 2023 mid-quarter update.

FRED data shows the same is happening at these small banks that power startup-friendly fintechs.

What’s going to happen if a deal to save SVB, the mothership of tech startup finance ,doesn’t come to fruition? Or, if depositors only get 40%-50% of their money back? It’s going to be a tech deep-freeze. Beware small banks.

“The gov’t has about 48 hours to fix a soon-to-be-irreversible mistake,” Pershing Square CEO Bill Ackman tweeted on the weekend. “These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions.”

“Already thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week,” he continued.

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CoinDesk TV

In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

Is ether (ETH), the native cryptocurrency of the Ethereum blockchain and the second-largest by market cap, an investment security? Penn State Dickinson Law professor Tonya Evans joined "First Mover" to discuss. Plus, Bitwise crypto analyst Ryan Rasmussen shared his crypto markets reaction as U.S. payrolls rose 311,000 in February. And, Rosetta Analytics co-founder Angelo Calvello weighed in on the collapse of crypto-friendly Silvergate Bank.


Circle to ‘Cover Any Shortfall’ in USDC Reserves, Sparking Stablecoin Rally: The company plans to use corporate resources to fill the gap, including external capital.

Silicon Valley Bank Depositors Will Have Access to "All" Funds Monday, Say Federal Regulators: “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” a joint statement read.

Scrutiny Falls on $43B USDC Stablecoin’s Cash Reserves at Failed Silicon Valley Bank: Circle’s USDC, the second-largest stablecoin with $43 billion market capitalization, held an undisclosed part of its $9.8 billion cash reserves at failed Silicon Valley Bank.

A Tale of 2 Banks: Why Silvergate and Silicon Valley Bank Collapsed: Every U.S. bank is facing similar structural pressures to what drove crypto’s one-time favorite bank to the moon and then into the ground.

Signature Bank Stock Down 12% in Volatile Action as Sell-Off Continues: The broader banking sector is down another 4% on Friday.

On-Chain Liquidations Beckon as Ether Slumps to 2-Month Low: A total of $119 million in on-chain positions are at risk of being liquidated if ether slides by another 20%.

How U.S. Judges Might Save Crypto From the SEC: Separation-of-powers offers hope to an industry under attack from unchecked executive power, says Michael Casey, CoinDesk's chief content officer.


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James Rubin

James Rubin was CoinDesk's U.S. news editor based on the West Coast.

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