OK, what is going on with SVB & WHAT NEXT ?
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OK, WHAT IS GOING ON WITH SVB ?
Crypto prices are up
Meme of the day
OK,WHAT IS GOING ON WITH SVB ?
How did we get here?
The parent business of Silicon Valley Bank, which has a large clientele of start-up companies and venture capital firms, is SVB Financial. With little over $60 billion in total deposits at the end of the first quarter of 2020, SVB. By the first quarter of 2022, that had risen sharply to just under $200 billion.
So, what did the bank do and why is that a problem ?
SVB Financial invested tens of billions of dollars in assets that appeared secure, including longer-term US Treasury bonds and securities backed by the federal government. At the end of 2021, SVB's securities portfolio had increased from roughly $27 billion in the first quarter of 2020 to about $128 billion.
These securities are at virtually no risk of defaulting. But they pay fixed interest rates for many years. That isn’t necessarily a problem, unless the bank suddenly needs to sell the securities. Because market interest rates have moved so much higher, those securities are suddenly worth less on the open market than they are valued at on the bank’s books. As a result, they could only be sold at a loss.
SVB’s unrealized losses on its securities portfolio at the end of 2022—or the gap between the cost of the investments and their fair value—jumped to more than $17 billion.
At the same time, SVB’s deposit inflows turned to outflows as its clients burned cash and stopped getting new funds from public offerings or fundraisings. Attracting new deposits also became far more expensive, with the rates demanded by savers increasing along with the Fed’s hikes. Deposits fell from nearly $200 billion at the end of March 2022 to $173 billion at year-end 2022.
So what's next? It's hard to predict how far the SVB contagion will spread or how long the effects will last, but buckle up because things will get rocky.
It isn't gonna affect just the stock market & startup world either, it will bleed into crypto too. And we're already seeing it begin...
Circle, issuer for the USDC stablecoin, announced it has $3.3B of its reserves stuck on SVB. USDC has depegged from $1 over the last 24h as panic has caused a sell-off
Coinbase announced it's temporarily pausing USDC: USD conversions over the weekend. What is this, a traditional bank?
Blockfi, the bankrupt crypto lender, has $227M stuck on SVB.
These might be the first companies to make announcements about their exposure to SVB, but certainly won't be the last.
What will happen to customers’ depsoits ?
The FDIC said in a statement on Friday that customers will have full access to their insured deposits no later than Monday morning. The FDIC said it hadn’t yet determined the current amount of uninsured deposits. But it said that uninsured depositors will get an advance dividend within the next week. For the remaining amounts of uninsured funds, those depositors will get something called a “receivership certificate,” and as the FDIC sells off the assets of SVB, they may get future dividend payments.
What have we learned?
One of the big questions coming out of this will be which banks misjudged the match between the cost and lifespan of their deposits and the yield and duration of their assets. This is very different from the questions about bad lending that haunted the 2008 financial crisis.
As money flowed into banks during the pandemic, buying the shortest-term Treasurys or keeping the money in cash would have insulated them from the risk of rising interest rates. But it also would have depressed their income. Banks’ reach for “safe” yield may be what haunts them this time around.
CRYPTO RALLY
Yesterday was full of green.Prices were green all around. To keep things green, I even added some vegetables to my supper dish.
In total, the crypto market gained ~$70B.
Bitcoin was up 9% on the day
Ether was up 7%
Cardano was up 12%
Solana was up 10.3%
Why the optimism? After watching banks fail, there might be some good ol' confidence in decentralised assets like cryptocurrency. It's also possible that the government is assisting depositors of SVB and Signature.
Nonetheless, CZ has recently injected the remaining $1 billion from Binance's recovery fund into the market in the form of BTC, ETH, and BNB (Binance Coin.)
Whatever it was, at least crypto’s prices aren’t in the gutter like its banks are…