It was almost exactly one year ago when Silvergate Bank — a small bank located in La Jolla, California, known for working with various cryptocurrency companies, including FTX — let regulators, investors, and customers know that after a run on deposits over the course of several months, it would be throwing in the towel and shutting down.

The closure represented a drastic downturn in fortunes for Silvergate, which had become the preeminent bank for crypto companies and had grown significantly since its founding in 1988. Briefly, the bank’s shares valued the company at about $7 billion — today, pink sheet shares value Silvergate at $10 million.

But Silvergate was only the beginning of the regional banking crisis and it actually turned out to be the easiest and simplest to clean up. As is becoming more and more clear by the day, the regional banking crisis of 2023 didn’t end when the calendar year turned over.

Read more: Crypto banking giant Silvergate is no more following NYSE delisting

The real crisis begins

On the same day that Silvergate announced its voluntary closure, another California bank, Silicon Valley Bank, made some dire announcements about selling off distressed assets, taking out loans, and the emergency sale of stock. This, inevitably, led to a bank run, and days later, a collapse.

But this collapse came with threats and warnings from venture capitalists and tech companies that had kept far more than the insurable $250,000 in their accounts. They suggested that if these deposits weren’t essentially insured by the Federal Depositors Insurance Corporation (FDIC), there would be a knock-on effect for regional banks across the country.

While the FDIC did decide to insure all depositors’ accounts up to any number at Silicon Valley Bank, it didn’t stop the VCs and companies from fleeing the bank in droves — and, in fact, despite the FDIC agreeing to bailout all the depositors, many other regional banks began to instantly feel the pinch.

Only days after the rescue of Silicon Valley Bank, Signature Bank in New York — another crypto-friendly bank — faced any bank’s worst nightmare, namely, a run on customer deposits in the wake of the turmoil. Similar to the promises made with depositors from Silicon Valley Bank, the FDIC promised that everyone would be made whole, regardless of the $250,000 limits on insurance.

California remained the epicenter for the crisis, with First Republic and PacWest Bancorp failing and being acquired, respectively, by mid-2023.

And then everything… just went on.

Read more: The show goes on: How Signature Bank’s bailout saved Broadway

Trauma without wisdom

So a year on from the crisis, the question remains: “What has been learned and how has the system changed?” The not-too-shocking answer is that, collectively, the American public, investors, and businesses have learned nothing and the system has refused to change.

A moment that could’ve been seized by banking critics and optimists alike was instead squandered. It was used as an opportunity to whinge about poor banking business practices and Federal Reserve rate hikes, instead of addressing depositor insurance policies and poorly thought-out hedging decisions.

A very real, very troubling crisis wasn’t truly averted — it was left to linger and fester, like a wrapped wound without antibiotics — and today we’re paying the price.

Only yesterday, New York Community Bancorp, one of the banks to purchase assets from the now-defunct Signature, was given a billion dollars to keep operations going. This private bailout comes after the stock plummeted 75% from recent highs.

In essence, what’s been learned yet again by the public, banks, and politicians is that fixing a leaky roof is unnecessary until a roof completely falls in on itself — that worthwhile practices and obvious changes don’t need to be instituted, even after times of crisis. It is unfortunate that regulators and politicians couldn’t see the forest for the trees and that even as another regional bank reached the teetering edge of failure the issues continue to go unaddressed.

Perhaps, when the pain is a little worse, when more depositors are hurt, and the FDIC can’t continue useless policies like $250,000 caps for insured accounts, action will be taken to stop wasteful and stupid banking and finance policies. But until then it’s business as usual.

See you at the next bank run.

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The post A year on from the US regional banking crisis, what’s changed? appeared first on Protos.

A report by the Congressional Research Service (CRS) has outlined the role of cryptocurrency in the failures of banks Silvergate, Silicon Valley, and Signature, stating that while the banks’ exposure to crypto was minimal, the perception of risk “may have driven non-crypto firms/individuals to make significant withdrawals.”

Analyst Paul Tierno from CRS, a nonpartisan agency that serves to inform Congress, concluded in their report that “volatility in crypto markets may expose banks to liquidity risks that could ultimately lead to fatal losses,” but contrary to beliefs, the banks’ exposure to crypto “was somewhat limited.” Dwindling deposits from crypto firms led banks to sell securities at a loss, which exacerbated liquidity issues and solvency.

“After reaching an all-time high of around $3 trillion in November 2021, crypto lost more than two-thirds of its market capitalization by December 2022,” Tierno wrote. “As digital asset prices fell, centralized crypto platforms and stablecoin issuers experienced redemptions, likely causing them to draw down deposits held at these banks. 

“To meet withdrawal demand, banks sold ostensibly safe securities for losses, affecting their liquidity and—in some cases—their solvency.”

Read more: How crypto market chaos affected US bank stocks

The report explained that in Q4 2022, Silvergate’s deposits fell by more than half, while Signature’s deposits dropped by 15% over the same period. “So in this case, losses were not realised on crypto-related assets, but crypto deposit withdrawals caused banks to sell other assets at a loss.”

The report by CRS serves as a reminder that crypto market chaos affected US bank stocks — and that SVB, Silvergate, and Signature were pushed over the edge by fear, uncertainty, and doubt.

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New York Department of Financial Services (NYDFS) superintendent Adrienne Harris has described the idea that last month’s Signature Bank takeover was motivated by crypto as “ludicrous,” reports Coindesk.

Harris reportedly made the remarks at the Chainalysis Links conference in New York.

Crypto Twitter has been awash with theories that the bank’s shutdown was related to a concerted crackdown on banks providing services to crypto firms. This line of thought was lent extra weight by Signature Bank board member Barney Frank, who claimed that the action was intended to send an ‘anti-crypto message.’

This theory, often referred to as Choke Point 2.0, is that regulators are specifically attempting to shut down the ability of cryptocurrency companies to access the banking system. It became popular after Silvergate announced that it was planning to liquidate, Silicon Valley Bank collapsed, and Signature Bank was shuttered.

Read more: US gov’t creates moral minefield after SVB and Signature bailout

Federal banking regulators have signaled in statements to banks that they need to be very careful about the nature of their engagement with the crypto ecosystem. A joint statement from the FDIC, the Board of Presidents of the Federal Reserve, and the OCC issued at the beginning of the year said that “the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”

Harris insists that the shutdown was actually prompted by a bank run and a high proportion of uninsured deposits that presented a significant systemic risk.

Bloomberg reported last month that Signature had been facing a criminal investigation by the Department of Justice (DoJ) related to dealings with FTX and Alameda Research before they closed.

Bloomberg also recently reported that Tether relied on accounts at Signature that were held in the name of one of its banking partners, namely Capital Union Bank.

Regardless of whether or not Operation Choke Point 2.0 is ‘ludicrous,’ crypto firms are struggling to find consistent banking partners.

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Fully compliant crypto companies should be placed on a ‘white list’ to help banks to determine which ones are safe to expose to their clients, says CryptoUK, the UK’s leading crypto trade organization.

As reported by CoinDesk, in a letter to regulators, CryptoUK says that circulating a list of safe firms is just one of a number of measures the government can take to prevent exchanges from being cut adrift from the financial system.

The suggestion is a response to increasing numbers of crypto companies being ‘de-banked’ due to financial institutions’ desire to protect their clients from potentially risky products.

The relationship between crypto and the banking industry is particularly turbulent at present, with prominent crypto banks Silvergate, Signature Bank, and Silicon Valley Bank either collapsing or being bailed out by the US government.

Read more: Blame the Fed: David Sacks and the VC who cried bank-run

In the letter, sent on Tuesday, CryptoUK said: “We believe that government action is now warranted because banks are implementing blanket bans or restrictions instead of taking a risk-based and case-by-case approach.

“[Our members] believe there are a number of potential solutions that can be explored, including creating a ‘white list’ of platforms that have engaged with the UK’s regulatory perimeter.”

The letter also suggests that, if this or a similar approach isn’t taken, the UK risks torpedoing its ambitions of becoming an established ‘crypto asset hub.’

As detailed by CoinDesk, another letter from CryptoUK also called upon the Financial Conduct Authority and Payment Systems Regulator to find a solution to the de-banking problem.

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One of crypto’s major banks, Signature, experienced liquidity issues following the loss of its major client FTX, leading to a sharp drop in stock price and a bank-run situation. Among its depositors were real estate and law firms — but no one was talking about how Signature’s collapse threatened to break the leg of New York’s musical theater scene.

According to an unnamed insider who spoke to Broadway News, Signature was one of two banks favored by the Broadway industry. Signature reportedly held 40-50% of Broadway shows and several supporting businesses — with show budgets regularly hitting the $10 million mark, the bank’s collapse would have severely impacted show biz.

“Broadway is all about relationships,” the accountant said. “Very often, a particular general manager or producer will have a relationship with a particular bank and that’s where they will do all their banking.”

• Broadway shows are set up as individual companies.
• Because of the scarcity of banks capable of catering to their needs, producers usually held all of a show’s funding in one bank.
• This put Broadway in quite a pickle while Signature was going under.

“We could have seen a situation where everything was frozen and possibly shows could have closed the following Sunday — or even the Thursday, really — if there was no payment there,” John Gore told the outlet. Gore is the chairman and CEO of the John Gore Organization, which presents, distributes, and markets Broadway shows.

Read more: US gov’t creates moral minefield after SVB and Signature bailout

“Some Broadway and touring theaters had also actually put the advances for the shows — their ticket sales — with Signature Bank,” Gore explained. “It would’ve basically created a systemic failing in Broadway itself.”

Of course, the catastrophies of Signature and Silicon Valley Bank’s collapses were averted. Thanks to an unprecedented bailout by the US government, all deposits were insured.

It looks like the show will go on — hopefully with a new banking strategy this time.

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The post The show goes on: How Signature Bank’s bailout saved Broadway appeared first on Protos.

While your favorite public-facing VC was having a complete meltdown and talking about buying guns on Twitter, financial regulators and governing bodies met behind closed-doors to stop what was beginning to resemble a regional-level bank run.

Their move became clear on Sunday when a joint decision was announced, ensuring that all depositors at Silicon Valley Bank (SVB) and Signature were fully covered – regardless of $250,000 limits on FDIC insurance.

The alteration seems to have driven the governmental bodies into an extremely morally hazardous minefield.

• The FDIC only guarantees the return of up to $250,000 to depositors if a bank goes under.
• The wealthy VCs that held accounts at SVB and Signature demanded the US government do away with the cap and cover all deposits.
• Mega-rich supporters like Mark Cuban chimed in; the US government acquiesced.

Are all deposits at all US banks covered now?

Well, no, they aren’t. Similar to the global financial crisis of 2008, the FDIC, Fed, and Treasury are using a series of extraordinary measures to mitigate a crisis and, at least for the time being, intend to rollback these procedures when the problems have been resolved.

Unfortunately, this decision has created a conundrum for government financial institutions: promise that every deposit in America in insured, or make Silicon Valley Bank and Signature the exception to the rule, giving the appearance of special treatment for a subset of the wealthy elite.

“The route taken is the simplest,” financial commentator Frances Coppola told Protos. “They’ve given these banks a collateral uplift and handed them a free pass.”

Even the same venture capitalists who demanded their centimillion or billion dollar deposits be covered at SVB or Signature seem to be calling for all US depositors to receive the same promises, with well-known VC, definitely not-a-libertarian, and All-In podcast cohost David Sacks saying, “The Fed may or may not realize it, but it’s created a two-tier banking system.” This is indeed the case.

Crisis averted; crisis created

The immediate bank-run danger appears to have been dealt with. Most banks that were seeing their stocks and depositors rushing for the exits have rebounded in the market, including, but not limited to, First Republic, Pacific West, Western Alliance, and Customers. But a new crisis is afoot, where regulators will have to determine if the banking system needs an overhaul in the wake of recent collapses.

“The problem,” said Coppola, “is that banks always have to leverage deposits somehow… if they won’t do it by lending, then they’ll do it some other way. The ramifications of this [crisis and its resolution] are quite dreadful – there will be consolidation in the US banking system,” she warned.

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Update 4:50 PM UTC, March 16: Title updated to include Signature.

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