USDC, Silicon Valley, Silvergate and Signature Bank: All explained simply

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TL;DR:

  • Silicon Valley Bank: Mass-invested with user deposits in mortgage-backed securities, which went bad after Fed rate hikes started
  • Silvergate Bank: Failed due to FTX exposure
  • Signature Bank: Failed due to FTX exposure + Fed interest rate hikes
  • Who pays? US Gov pays for bail-out of Silicon Valley Bank and Signature Bank. Sivergate Bank has enough money to honor all deposits by its own.
  • Haru Invest: Officially confirmed not exposed to Silicon Valley Bank. No explicit response for Silvergate and Signature Bank, but thatโ€™s very low chance too.
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During 2023 apparently the bumps on the road of Decentralized Finance seem to continue.

On 7 March Jerome Powell, the Chairman of the Federal Reserve System (Editor's note: Also known informally as "Fed", the Central bank of United States of America) has made a statement that further aggressive increase in interest rates might be needed[5]. This statement has destroyed investor hopes that the U.S. might have won the battle with inflation and has sent markets in a negative direction.

When the Federal Reserve raises interest rates, this usually results in a significant impact on banks, which then face increased borrowing costs, which can reduce their profitability and make it more difficult for them to lend to customers[2].

Due to high interests on mortgage-backed securities (Editor's note: A type of financial instrument that represent a claim on the cash flows from a pool of mortgages. Usually bundled together and sold to investors in the form of securities) many banks have recently came under pressure[2].

Following this cause-effect framework 3 large U.S. banks have went bankrupt within a single week, together with major impacts to the crypto industry and we will try to find the reasons why.

Silvergate Bank

Image 3: Silvergate Bank announced its liquidation on 08 March 2023.

Silvergate Bank has been started in 1988. In 2016 it started to provide cryptocurrency services. After the collapse of FTX in November 2022, the bank was questioned multiple times with regard its exposure and actual liquidity. Yet, it was not until 8 March 2023, when the bank admitted its financial troubles and decided to close down operations for good.

However, unlike Silicon Valley Bank and Signature Bank, Silvergate Bank has decided to single-handedly honor all payments of all depositor, without causing panic or relying on any government funds.

Failure reason: FTX exposure

Ultimately, the reason for the closure of the bank was its exposure to FTX.

Signature Bank

Image 2: Signature Bank was forcibly closed by U.S. regulators on March 2023 citing "systemic risks" for its clients.

Signature Bank was one of the biggest crypto lending banks in America. It was forcibly closed by New York branch of FDIC on 10 March 2023, citing "systemic risks", together with a promise that all investors "will be made whole" by the U.S. government.

Signature had $110B in assets, and a $88.6B in deposits making it the 29th bank by asset size in the U.S., together with a market valuation of $4.4B[2].

The main problem with Signature Bank was that most of its deposits were above the warranty limit of $250 000 (Editor's note: Under U.S. law all customer bank deposits up to $250 000 are guaranteed by the government even if the bank fails, but sums beyond that are not) and there were growing concerns by the U.S. regulators that it couldn't honor all its withdrawal by itself[2].

Failure reason: FTX exposure and Fed rate hikes

The chief reasons for the financial trouble of the bank is that many users have withdrawn their deposits after the collapse of FTX, together with diminished profitability following the aggressive Fed interest rate hikes.

Silicon Valley Bank

Image 1: Silicon Valley Bank was closed on 10 March 2023 by U.S. banking regulators.

Silicon Valley Bank was shut down on 10 March 2023 by US banking regulators[1](Editor's note: The Federal Deposit Insurance Corporation) after customers rushed to withdraw $42B (a quarter of its total deposits), resulting in the second largest bank failure in the U.S. banking history[6].

In 2021, Silicon Valley Bank experienced a massive wave of deposits, with its assets increasing almost threefold from $61.76B (late 2019) to $189.20B (late 2021) in just 2 years.

With such large growth of deposits, the bank couldn't grow its loan book at the same speed and it has decided instead to purchase a large amount of $80B mortgage-backed securities. 97% of these purchased items had a duration of 10% years with an average profitability of just 1.56%.

Unfortunately in 2022-2023 Fed raised interest rates and the valuation of these investments has plummeted, since now investors could purchase government bonds with a 2.5x higher yield.

Failure reason: Liquidity doubts and bank run

The problem surfaced when Silicon Valley Bank has then decided to sell $21B of its securities with a $1.80B of loss. It had additionally raised another $2.25B in equity and debt. ย These actions made it clear to investors that the bank might have no reserve liquidity and it triggered a panic withdrawing from the bank[4][7].

U.S. government covers costs for Signature Bank and Silicon Valley bank

In a memorable application of the principle of "Too big to fail", the U.S. government has announced that depositors in Silicon Valley Bank will have access to their funds starting 13 March 2023, as well as the clients of of Signature Bank.

Jerome Powell, the Chairman of the U.S. Federal Reserve, Janet Yellen, the U.S. Treasury Secretary, and Martin Gruenberg, the Chairman of the Federal Deposit Insurance Corporation (FDIC), issued the notice officially in a joint statement[2].

USDC stablecoin depegged

USDC is a stablecoin which is managed by Circle. Circle maintains a portfolio of financial assets which guarantee the value of USDC. Unlike Tether USDT, USDC has always been considered a safer and well-backed stablecoin.

However, unfortunately part of these reserve assets of USDC apparently were among the inaccessible funds locked in the now troubled Silicon Valley Bank. Precisely, $3.30B USD from the total $40B reserves of Circle were affected by the insolvency of the failed bank[1]. The firm disclosed that Silicon Valley Bank is one of six banks Circle uses for managing 25% of its USDC reserves[1].

Image 4: USDC reserves by asset type

When this information was made public, a massive sale of USDC coins has began in the market, sending the supposed "fixed" price of $1.00 to as low as $0.87 during the weekend of 10-12 March.

Image 5: USDC has broke its peg from $1.00 to $0.87 amid Silicon Valley Ban liquidity crisis.

As a result, Coinbase and Binance have temporarily suspended the convertibility of USDC to other assets[1].

Fortunately, the price has been restored to $0.99 on Monday when the U.S. government has announced its intervention in bailing out Silicon Valley Bank, thus solving the crisis with USDC for good[4].

Is Haru Invest exposed?

When it comes to Haru Invest, the company has confirmed on its Twitter account that it is not directly exposed to the locked deposits of Silicon Valley Bank:


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References

  1. Decrypt, Coinbase, Binance Suspend USDC Conversions as Dollar Peg Wobbles, 11.03.2023: https://decrypt.co/123208/coinbase-binance-suspend-usdc-conversions-as-dollar-peg-wobbles
  2. Decrypt, Feds Shut Down Signature Bank, Say Signature and Silicon Valley Bank Depositors Will Be Made Whole, 13.03.2023: https://decrypt.co/123270/feds-shut-down-signature-bank-say-signature-and-silicon-valley-bank-depositors-will-be-made-whole
  3. Twitter, Circle, 13.03.2023: https://twitter.com/circle
  4. Personal research of the author.
  5. The Wall Street Journal, Jerome Powell Says Fed Is Prepared to Speed Up Interest-Rate Rises, 07.03.2023: https://www.wsj.com/articles/jerome-powell-to-testify-to-congress-on-outlook-for-rates-inflation-e4e7f1e3
  6. The Wall Street Journal, Silicon Valley Bank Closed by Regulators, FDIC Takes Control, 10.03.2023: https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522
  7. Twitter, @jamiequint, 10.03.2023: https://twitter.com/jamiequint/status/1633956163565002752