The Unfolding banking crisis: Silvergate Capital and Silicon Valley Bank (SVB)

The collapse of Silvergate Capital and Silicon Valley Bank (SVB) has sent shockwaves through the financial world. Both banks were unable to withstand a classic bank run as their customers, which included crypto exchanges and tech startups, faced business challenges due to economic and financial conditions. This led to declining deposits and rising cash withdrawals, coupled with the banks’ long-dated non-cash holdings being battered by the markets. As a result, when cash demands got high enough, Silvergate and SVB had to sell those backing assets at substantial losses. U.S. Treasury bonds made up large portions of the money-losing liquidations.

The collapse of these two banks was due to two upstream sources: real business cycle issues and Federal Reserve interest rate tightening. These factors are interrelated and go back to COVID-driven disruptions. Fed rate hikes were the most immediate pressure that crushed Silvergate and SVB. Rising yields on U.S. Treasurys crowded out new investments in high-risk sectors, including tech and crypto. But rising interest rates also present another threat to banks’ stability. The issuance of new Treasury bonds with higher yields has lowered the market value of pre-hike bonds with lower yields, and most banks hold large amounts of Treasurys as legally required collateral.

Silvergate and SVB also faced specific business cycle issues that may not apply more broadly. Both catered to sectors – crypto and venture-funded tech firms, respectively – that saw huge runups in the early stages of the COVID-19 pandemic. Both sectors benefited from COVID lockdowns, and crypto in particular benefited from the pandemic relief checks sent to Americans. That means both banks saw massive inflows through 2020 and early 2021. Silicon Valley Bank’s balance sheet tripled between the end of 2019 and March 2021. Silvergate’s assets also grew massively in 2021. Both banks would have bought more bonds as collateral to backstop that deposit growth – at a time when rates on those bonds were still around 1%. Rates on new bonds are now closer to 4% thanks to Fed rate hikes, driving down demand for the older bonds.

It is important to note that blaming this situation on any one particular factor or group would be a mistake. The COVID-19 pandemic has disrupted the economy in countless ways, and everyone is simply trying to escape the same shipwreck in the same leaky lifeboat while fighting over who gets eaten first. It would be easy for some, particularly bitcoiners, to blame the Fed for hiking rates, but this was a necessary measure to rein in inflation. Inflation was a result of real cost rises linked to COVID-19, as well as a money supply significantly expanded by COVID relief and bailout policies. Conversely, it would be tempting for many in the mainstream to blame the cryptocurrency sector itself for the incipient banking crisis. Silvergate, “the crypto bank,” fell first, but its fall isn’t going to materially feed into any future bank failures.

Overall, every bank in America, regardless of its funding focus, is facing many of the same structural pressures due to the COVID-19 pandemic. While financial levers can provide some relief, they cannot entirely smooth over the kind of real-world chaos caused by a virus that has killed over six million people. It remains to be seen how the collapse of Silvergate and SVB will impact the crypto industry, but it is clear that the fallout from the pandemic will continue to impact the financial sector for years to come.