The Silicon Valley Bank Collapse (Everything You Need to Know)
Article source, here.
TL;DR
Last week, Silicon Valley Bank experienced a bank run.
California regulators shut it down, placing it in receivership under the Federal Deposit Insurance Corporation (FDIC).
SVB were in full compliance with the rules and regulations set in the aftermath of the 2008 Global Financial Crisis.
Circle, operator of the USDC stablecoin, had $3.3B of its reserves with SVB.
While USDC depegged from its expected $1 USD parity (getting as low as $0.88 over the weekend), as of this writing it has since returned to $0.97.
Full Story
Let's start with the absolute basics.
Who / what / where / when.
Silicon Valley Bank (SVB) was the 16th largest U.S. bank, with ~$212B in assets.
It's primary focus? Serving startups.
This past week, it experienced a bank run.
As a result, California regulators shut it down, placing it in receivership under the Federal Deposit Insurance Corporation (FDIC).
Translation: it went kaput after too many people tried to withdraw their money at once.
As seen here in this example from, The Simpsons 👇
Ok, but how did this happen?
Right. So, we have some bad news for you.
The money you deposit into your bank account(s)?
Yeah, well...uh...your bank doesn't have to keep it all on hand.
In fact, most banks are allowed to lend/invest up to 90% of the money you give to them for 'safe keeping.'
I.e. You deposit $1K → the bank can lend/invest $900 of it.
This is called fractional reserve banking, and SVB - along with every sizeable bank in America - operates under this system.
So what happened with SVB?
Basically, SVB had invested a large chunk of their reserves (reported to be ~$100B) in 10 year treasury bonds and mortgage backed securities.
Cool. What the hell are they?
Think of US treasuries bonds as an investment in the US monetary system, and MBS' as an investment in the US housing market.
(Not a perfect analogy, but enough to get us through).
Either way, these investments are widely considered to be super safe bets.
The main sticking point of this strategy was the fact that these investments were made on 10 year terms - meaning SVB couldn't get their investment back for a decade.
Which, is fine, as long as:
Customers keep depositing money to cover basic withdrawals.
Too many customers don't try and take their money out at once.
...can you guess what happened next?
SVB's deposits slowed right up, and word started to spread that they might be in a tight spot.
As a result, enough people decided to take their money out to trigger a bank run.
But here's the twist!
SVB were playing by the rules.
Sure, they were in a tight spot...but they weren't doing anything shady.
In fact, they were in full compliance with the rules and regulations set in the aftermath of the 2008 Global Financial Crisis.
Rules that were created to protect against this very thing.
...so how did we get here?
One common theory: technology got too good.
You see, back in 2010, when these rules were set, smart phones and social media were yet to be 'everywhere' - and a lot of banking was still done in-person.
Which meant that:
Panic had a harder time spreading.
Even if enough people decided to withdraw their money - the friction of in-branch withdrawals could have helped slow the process and given these institutions more time to recapitalize.
But in 2023, things move faster, thanks to smart phones and online banking.
Case in point: the SVB collapse began on Wednesday, and was all but over by Friday morning.
That's fast. Too fast (and too furious) for an institution like SVB to effectively manage.
Ok...how does this apply to crypto? (This is Web3 Daily isn't it?)
Fair point - and unfortunately, yes, this has touched crypto.
Circle, operator of the USDC stablecoin, had some of its reserves with SVB.
$3.3bn to be exact.
Which, as of this writing, is less than 10% of USDC's total value of $39.2B.
The majority is held in short term US treasury bills ($32.4B), similar to the ones SVB held, except Circle can get its money back within 3 months instead of 10 years.
So, they're safe...right?
Honestly, we don't know. It feels like anything goes at this point.
The good news is, while USDC depegged from its expected $1 USD parity (getting as low as $0.88 over the weekend) as of this writing it has since returned to $0.97.
Not perfect. But a move in the right direction.
Which leaves everyone in a strange situation, where no one knows where to put their trust - banks or crypto?
Where to from here?
Ok, so this is where it gets bleak.
Let's break this into two parts:
This week
The months to come
This week:
A LOT of tech companies used Silicon Valley Bank (that was their thing).
Which means there's a good chance much of the tech world will not be making payroll this week (and potentially, for many weeks to come).
Google, Apple, Microsoft, will all have plenty of cash reserves outside of SVB to weather any potential storms here.
...but for the smaller tech companies? The outlooks not so good.
And to make matters worse, if a company doesn't make payroll, its employees can sue them.
Which sets up a new potential sh*t storm of a problem:
If a large amount of a company's cash reserves were tied up in SVB, how long will it take to get back?
And how long can they go without paying their workers, before they get sued to oblivion?
There's a solution...but you're not going to like it.
These companies could fire large swaths of their workforce, pay severance as a 'one time fee,' and dodge any potential lawsuits.
It's grim. But it's something we may see happening as soon as this week.
The coming months:
As of yesterday the US Treasury Department has said it's not bailing SVB investors out (shareholders), but it will make depositors whole (folks with accounts).
Either way, it sends a very clear message to anyone that uses a regional bank, similar to SVB:
'SVB played by the rules and it didn't work. This could happen to your bank - and if it does, sure, the government can help...but how long with that take? Best course of action: get your money out now.'
It's a message that inspires more fear, and could lead to further bank runs.
(Told you it got bleak!)
Ok, ok, sweet baby Jesus (and the grown one too)...
Let's take a time out, take our foot of the accelerator and dial back the fear.
Right now, a lot of the scary stuff we're talking about here is just a potentiality. It might not happen.
As of this very moment, all that has happened is this:
A Californian bank has collapsed, a stablecoin briefly lost its peg, and Twitter has a new scandal to gossip about.
Anything beyond that is yet to be realized.
Let's hope it doesn't go too far beyond where it already is.