BUZZ BEAT MEDIA

First Republic Bank, Silicon Valley Bank, and Signature Bank are some of the behemoths of the American banking industry, but they weren’t immune to what was dubbed as the 2023 banking crisis.

Silvergate Bank, a lesser known cryptocurrency-centered financial institution, was the first to fail among the 4, a downward spiral which occurred in just 6 days.

Silvergate Bank’s Demise

The California-based bank had its beginning in 1988, catering both savings and loaning needs. In 2010s, the bank dabbled in cryptocurrency and eventually pursued acquiring regulatory approval for its expanded services. 

The bank doubled its assets in 2017, and by 2022’s last quarter had 90% cryptocurrency related bank deposits, making it vulnerable to the cryptocurrency-centered bank run that happened in November 2022, as a consequence of the Bahamas-based cryptocurrency exchange FTX’s liquidation.

When last year ended, it was solvent, yet the following months saw clients requesting to withdraw more than $8 billion of their deposits, forcing Silvergate to sell its assets below their actual value, and ending up borrowing $3.6 billion from Federal Home Loan Bank of San Francisco to keep on operating.

However, the effort proved futile, and Silvergate announced on March 8 that it would be undergoing voluntary liquidation and will pay back all the depositors it owes

Silicon Valley Bank (SVB) Also Gets Hit with a Bank Run

Silicon Valley Bank reported a rise in deposit levels during the COVID-19 pandemic when the technology industry experienced a period of growth. In 2021, it bought long-term treasury bonds to take advantage of the increased deposits. Nevertheless, the current market value of these bonds dropped as the Federal Reserve increased interest rates to control the 2021–2023 inflation rise. Higher rates of interest also increased borrowing costs across the economy and some Silicon Valley Bank clients started withdrawing their funds to meet their liquidity requirements.

Also occurring at the heels of FTX’s collapse, the California Department of Financial Protection and Innovation (DFPI) took control of SVC on March 10 and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC). The FDIC set up the Deposit Insurance National Bank of Santa Clara to take care of insured deposits, and declared that it would start paying dividends for uninsured deposits the following week – the dividends were funded by money made from the sale of SVB assets. Almost 89 percent of the bank’s US$172 billion in deposit liabilities were too high to be covered by the FDIC.

Signature Bank Seized

In order to wean itself from its reliance on real estate loans, Signature Bank started courting clients in the cryptocurrency sector in 2018. To do this, it hired people with experience in the field. By August 2022, the bank’s holdings had grown to $104 billion, up from around $36.3 billion at the end of the 2018 fiscal year. In that month, more than one-quarter of the bank’s deposits were owned by cryptocurrency enterprises. Large cryptocurrency exchange operators like Celsius Network and Binance were among its clients in the sector of cryptocurrencies. The second-largest provider of financial services to the cryptocurrency industry by early 2023 was Silvergate Bank, followed by Signature Bank.

Depositors in Signature Bank started to withdraw deposits in the billions of dollars as cryptocurrency prices fell sharply in 2022, especially after the failure of cryptocurrency exchange FTX. By the end of the year, deposits in the bank totaled about $88.6 billion, down from $106.1 billion at the start of the year, when more than one-quarter of deposits were held by entities related to digital assets. To lessen the bank’s exposure to the risk associated with the cryptocurrency market, Signature Bank severed its business relations with the cryptocurrency exchange Binance toward the end of 2022. 

Barney Frank, a board member of Signature Bank, claims that on March 10, the bank experienced a multibillion dollar bank run as a result of depositors’ worries about the hazards associated with cryptocurrencies for the institution. Investor trust in the bank was also severely impacted, and on that Friday—the day the Silicon Valley bank collapsed—the bank’s shares fell by 23%, marking the then-largest single-day loss in the value of the Signature Bank in its 22-year history.

The New York State Department of Financial Services closed down Signature Bank on March 12, 2023, the third-largest financial failure in American history, two days after Silicon Valley Bank went under. After customers started withdrawing their deposits in favor of larger institutions, the bank was unable to close a sale or otherwise strengthen its finances before markets opened on Monday morning to protect its assets, and shareholders of the bank lost all invested money. The FDIC placed the bank under receivership and promptly founded Signature Bridge Bank, N.A. to run its marketed assets for interested bidders.

On March 19, the New York Community Bank (NYCB) and Signature reached an agreement for the NYCB to pay $2.7 billion for about $38.4 billion in assets. Forty Signature branches were changed over to Flagstar Bank, one of NYCB’s subsidiaries, as a result of the agreement.

First Republic Bank Meets Its End

Other institutions, like the San Francisco-based First Republic Bank, which was the 14th-largest U.S. bank at the end of 2022, came under intense scrutiny and criticism. On March 13, its shares fell by 62%. On March 16, the bank secured a $70 billion financing facility from JPMorgan Chase & Co. in addition to a $30 billion lifeline in the form of deposits from several major U.S. banks as a result of the bank’s severe liquidity problems. Under Jamie Dimon’s leadership, eleven of the top U.S. banks took part in the rescue operation.

The private-sector rescue effort “may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing,” according to S&P Global, which downgraded First Republic Bank’s credit rating by three notches into junk on March 19. In its quarterly report for April, the bank reported that deposits had fallen by more than $100 billion. The announcement resulted in a more than 20% decline in the share price of the bank.

On April 28, the bank disclosed plans to start firing employees and selling its bonds and securities at a loss to raise equity. Additionally, numerous advisor teams started to leave the bank. 

When it was revealed that the FDIC was thinking about taking the bank on that day, the stock price fell another 43% to $3.50.  The FDIC announced that it will soon take over the bank after after-hours trading saw a further 42% decline.  The following day, the FDIC contacted several banks, including JPMorgan Chase, PNC, and Bank of America, informing them that they had until April 30 to submit offers for First Republic Bank. In 2023, the cumulative decline in stock price was 97%. 

The assets of First Republic were sold to JPMorgan for $10.6 billion, according to an announcement made by the California Department of Financial Protection and Innovation on May 1st. First Republic had been closed.

Plan of Action and Forecasting

To ease market turbulence, the Federal Reserve and a number of other central banks announced major USD liquidity measures late on Sunday.  The U.S. took “coordinated action to improve liquidity provision through the standing U.S. dollar swap line arrangements.” The daily U.S. dollar swap operations are coordinated by the Federal Reserve, the Bank of Canada, the Bank of Japan, the European Central Bank (ECB), and the Swiss National Bank. These trades were previously programmed to happen on a weekly cycle.

The S&P 500 bank index (SPXBK) was down 14% year to date in April on expectations of weaker quarterly profitability for some US banks, despite the fact that higher interest rates allow banks to earn greater returns on loans made to customers. With the caveat that “uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the International Monetary Fund cut its projection for global GDP growth in 2023 from 2.9% to 2.8% on April 11. The prediction indicated a decline from 3.4% in 2022, but growth was still expected to pick up slightly to 3.0% in 2024.

*Cover Photo/Thumbnail Photo from REUTERS/Androniki Christodoulou