Where Silvergate, SVB and Signature Went Incorrect


For people my age, Han Solo telling Luke Skywalker “Great, kid! Don’t get cocky!” after Luke shot down a ship for the primary time is a seminal movie moment. As a child, I didn’t even know what “cocky” meant! But I knew the road was hilarious. I repeated it over and another time — little question annoying everyone around me.

I actually wish some bank executives had listened to Han Solo. In the event that they had, we won’t have had the bank runs we saw over the past several days. And we wouldn’t be anxious about crypto’s banking problem.

Considered one of the ironies of the crypto industry is that it needs banking partners. Give it some thought. Crypto is designed to disrupt money and banking as we realize it. But to operate at once, crypto corporations need banks. Crypto exchanges need banks to carry onto the money their customers deposit to purchase and sell crypto. Crypto startups need banks to handle payroll, rent, vendors and the numerous other services needed to run a business. Crypto enterprise capitalists need banks to carry onto their money in order that they can invest it. But since the U.S. government has been telling banks to avoid the crypto sector, only a couple of banks have chosen to work with the crypto sector. Silvergate and Signature were two of those banks. Each banks (together with Silicon Valley Bank) got slightly cocky. And now they’re paying the worth.

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Silvergate was making tons of cash being a crypto bank. The truth is, it was making a lot money banking the crypto sector that it didn’t hassle to diversify its client base. Oops. Here’s how the Silvergate bank run played out. First, it took much of the cash that had been deposited and parked it in traditionally secure investments like Treasury notes, mortgage-backed securities, and municipal bonds. The goal was to generate some income off of the cash that it was just holding onto. There’s nothing mistaken with that. And these investments are generally not dangerous. 

But then the Federal Reserve began raising rates of interest to fight off inflation and Silvergate’s assets dropped in value. Uh-oh. Then the FTX debacle combined with a crypto bear market and a tech recession prompted Silvergate customers to withdraw money. And so they kept withdrawing. And suddenly, Silvergate didn’t have enough money or assets (even when it sold them) to cover the withdrawals. 

If Silvergate had a wide selection of clients, the FTX debacle and crypto markets wouldn’t have prompted a bank run. Insurance firms, retail stores and small businesses had no reason to expire and withdraw their money. But since it hadn’t diversified its customer base enough — AND it hadn’t discovered how you can manage the Fed rate hikes — a bank run ensued. 

The identical thing happened to Silicon Valley Bank (SVB). Most of SVB’s clients were within the tech industry. The tech industry is getting hammered. If SVB had diversified its client base, there likely wouldn’t have been a bank run. But SVB got cocky. It was living the large life because the tech industry boomed. And it didn’t de-risk its customer base.

Signature’s crypto risk was much smaller than Silvergate’s. It had a various client base. But the federal government still closed it due to the potential of “systemic risk.” In some ways, Signature is a victim of circumstances. People became anxious about smaller regional banks. That triggered withdrawals. The federal government didn’t want one other bank to go under. That combined with Signature’s small crypto business — which the federal government just isn’t glad about — prompted the closure.

Signature underestimated how much the federal government disliked the indisputable fact that it had crypto clients — and the rapid spread of the bank runs to a lesser degree. It got slightly cocky. And it paid the worth.

All of this could function a wake-up call to all banks. They will’t afford to get cocky — especially with rates rising and inflation being uncontrolled. They should actively manage risk and make sure that they’re well capitalized. It’s not a passive activity anymore. And banks must act accordingly.


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