This past year, in 2022, Canada and the US raised their interest rates to fight inflation. Even if the inflation is cooling down, there are more significant disadvantages to the rising interest rate. Is it really the cause of bank collapse?
After the fall of Washington Mutual Bank in 2008, the first most significant bank failure in the US, last Friday, March 10, 2023, comes the second largest bank fall. The Silicon Valley Bank had a sudden collapse triggered by a bank run. A bank run is when depositors withdraw significant money from the bank in fear that the bank will become insolvent.
Below are some bank failure data.
What causes the bank collapse?
A bank run is indeed the cause of its collapse, but the roots of its demise go back several years. Like other banks, Silicone Valley Bank ploughed billions into US government bonds during the era of near-zero interest rates. A bond is a debt security, similar to IOU. Borrowers sell bonds to attract investors willing to lend them money for a predetermined period.
When the interest rate rises, the bond value will fall. With the continuous increase in interest rates in 2022, the US banks have unrealized losses of $ 620 billion. These assets that lost their value and have not yet sold, according to FDIC data. If the Fed continues to raise its interest rate, it will continue losing value.
SVB is the 16th largest bank in the US, with $209 billion. Even though it looks like a large amount, it is only 0.9% of overall assets in US banks.
SVB locked $ 1.8 billion of losses on bonds before the collapse as it rushed to sell securities to shore up its balance sheet.
The regulators closed Silicon Valley Bank because the bank did not have enough cash to pay depositors.
How about the deposits? Are they safe?
For depositors with $250,000 or less in cash at SVB, the FDIC said they will have access to their money when the bank reopens.
But on the other hand, depositors with more than $250,000 in their account may not get the rest of their money. FDIC will give the Receiver’s Certificate to depositors with the uninsured amount of their deposit. If SVB’s investments have to be sold at a significant loss, uninsured depositors may not get additional payment.
Signature Bank Collapse
After Silicon Valley Bank fail. The Signature Bank became the third largest bank failure in the US last Sunday, March 12, 2023. The same bank run happened at Signature Bank.
Signature Bank is a lender that has recently begun focusing on the cryptocurrency industry and serves primarily real estate and law firms.
And it is said that the collapse of Signature Bank can cause uproar in the cryptocurrency industry, especially when Silvergate Capital, a crypto-friendly bank, also had its downfall last week. The fall of Signature bank is triggered by the sudden fall of SVB.
As choice institutions fall, crypto companies may be forced to choose alternative, often riskier, banking options.
Jeremy Allaire, chief executive of Circle, tweeted last Sunday that his company will not be able to mint or allow redemption of the USDC through Signet, the backend payment network run by Signature Bank.
Coinbase, which held roughly $ 240 million in corporate cash with Signature Bank, said they will operate as usual and their client’s funds are safe and accessible.
Signature Bank was essential in the crypto ecosystem as a New York-based company regulated under the state’s comprehensive financial law.
Yadav said that crypto firms have to figure out what to do next because it doesn’t look like banks will be excited to offer crypto firms banking business going forward.
President Joe Biden on Bank Collapse:
On March 13, President Biden’s message aimed to assure Americans of the safety and strength of the US banking system. He gave assurance that the deposits were safe.
In addition, Biden also said that the management of the said banks should be fired, and if the bank is taken over by FDIC, the people running the bank should not work there anymore. Additionally, investors are not protected as they knowingly took the risk.
Biden dodged questions about the reason behind the bank collapse. But financial experts say that both banks are affected by the continuous rise of the interest rate, which negatively affects the assets such as bonds and mortgage-backed securities.
Fed raised their interest rate seven times in 2022 to tame inflation, which gives the banks more chances to find a solution to prevent the collapse. However, the failure still happened.
Bank collapse and crypto come together.
The sudden collapse of banks significantly impacts not just the banks themselves but the other banks as well. Bank collapse has a domino effect. It will affect the housing market, mortgage, credit, etc.