March was not a great month for the U.S. banking sector to say the least. The collapse of crypto-friendly Silvergate and Signature Banks sandwiching that of heavily tech-sector-invested Silicon Valley Bank, prompted emergency action from the authorities in an attempt to prevent the contagion from spreading to the wider market.
That seems to have been achieved, for now. So let's look back at the events leading up to the crisis, how each bank’s closure played out, and what, if anything, has happened to the banks since.
Observers first reported on the growing turmoil in early March, asking what on earth was happening in the U.S. crypto-banking sector. Both Silvergate Bank and Signature Bank seemed to have been caught up in the aftershock of the FTX exchange collapse last November.
Both banks were well-known for providing banking services to the crypto sector, notably including fiat payment rail networks for many major cryptocurrency exchanges. Following the problems at FTX, this crypto exposure caused a run on the banks, with panicked customers withdrawing more than either bank could cover.
To plug these holes in the balance sheet, both Silvergate and Signature secured billions of dollars in loans from the Federal Home Loans Banks system. Again, largely due to the banks’ crypto exposure, these loans caused an uproar among Washington lawmakers, meaning that the banks had to sell off assets at a loss. Ironically, these assets included U.S. government bonds which had decreased in value due to the Federal Reserve raising interest rates.
Additionally, the two banks were facing questions from increasingly hawkish government agencies over their involvement and culpability for the fraudulent diversion of funds between FTX and Alameda. With the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation warning banks that they should keep well away from crypto companies, both Silvergate and Signature made moves to reduce their exposure.
When Observers first checked in, Silvergate had discontinued its Silvergate Exchange Network, and Signature had ended support for transactions of under $100,000 in value for all its crypto exchange clients.
By that stage Silvergate was already in eleventh-hour talks with the FDIC, looking for a way to salvage the bank and avoid liquidation. However, with the parties unable to way a way forward, the bank entered voluntary liquidation shortly afterwards. A disappointing outcome, for sure, but nothing compared to what was to come over the following weekend.
Next up was a bank run on Silicon Valley Bank, which had far less crypto exposure, but managed to cause USDC to depeg from the dollar, due to Circle holding $3.3 billion of the stablecoin’s reserves at the bank. On March 10 the FDIC stepped in to forcibly close down the bank, citing a systemic risk to the wider U.S. banking sector.
Two days later on March 12, the FDIC closed Signature Bank for the same reason. This ‘systemic risk’ designation allowed it to guarantee all deposits at the two institutions, rather than just the $250,000 limit covered as standard. Bridge banks were set up for customers to access their funds.
Just one week after Signature Bank was forcibly closed, the FDIC sold the bridge bank, most of its deposits and its 40 branches to the Flagstar Bank subsidiary of New York Community Bancorp. Notably the deal did not include around $4 billion in crypto banking deposits and $60 billion in loans.
At the end of March, First Citizens Bank assumed all customer deposits and acquired all loans of Silicon Valley Bank in the US. The official statement included information about a loss share contract and a line of credit from FDIC for contingencies:
As part of the agreement, First Citizens Bank will assume Silicon Valley Bridge Bank, N.A. assets of $110 billion, deposits of $56 billion and loans of $72 billion, based on latest information provided by the FDIC. First Citizens Bank will additionally receive an available line of credit from the FDIC for contingent liquidity purposes. In addition, First Citizens Bank has entered into a loss share agreement with the FDIC to provide further downside protection against potential credit losses. First Citizens Bank will not acquire any of the assets, common stock, preferred stock, debt or assume any other obligations of SVB Financial Group, the former holding company of Silicon Valley Bank ("SVB").
The UK subsidiary of SVB was acquired immediately after its collapse by HSBC UK in a rescue deal for a token amount of £1.
Meanwhile Silvergate, having not been forcibly closed by the FDIC, has been continuing to liquidate its assets. This has reportedly included taking a $44 million loss on a bitcoin loan to Microstrategy, but the real jewel in the crown of Silvergate’s assets is surely its Exchange Network.
Rumours suggest that this is seeing interest from several potential buyers, who would certainly see the value in a pre-tested fiat on-ramp which was until recently servicing multiple major crypto exchanges.
The real question must be, with the increased scrutiny from US regulators, who is brave enough to take it on? We will be here, Observing, as always.