This week, amid growing concerns about a looming recession that may already have begun, two banks in the United States collapsed.
Both banks served the tech industry, already badly hit by rate hikes and the general downturn resulting from the COVID-19 pandemic and the war in Ukraine, albeit in different ways.
The first bank to implode was Silvergate, a California bank founded in 1988 that has gone all-in on banking the crypto industry in recent years. It ran into trouble when the crypto economy collapsed last year, with depositors withdrawing their money at a staggering rate – within months their deposits dried up from over $12 billion to just under $4 billion by the end of 2022. The bank tried to sell securities , which it had bought to cover losses, but rising interest rates had eroded their value. The bank received a $4.3 billion loan from the Federal Home Loan Bank (FHLB) — effectively a federal bailout — but when its fortunes went sour, the FHLB immediately demanded its money back. As troubles mounted, the bank’s shares fell, and finally on Thursday it announced voluntary liquidation.
The second bank to fail was Silicon Valley Bank (SVB), which over the decades has become the banker of choice for startups. SVB announced this week that it was raising funds to help offset losses from the tech industry downturn, which has caused shares of even big companies like Meta and Tesla to plummet. Rumors of SVB’s precarious financial position had been circulating for months, and analysts warned that it – and other banks – is offering high interest rates to keep customers, even though it still has plenty of soft loans (issued in better times). Simmer. The announcement of the fundraiser sparked a bank run, with techies flocking to collect their money. The SVB closed on Friday.
Now that two banks have fully collapsed, many are concerned about contagion – that is, whether the collapse of these niche banks could spill over into the wider economy. Shares of other banks in the US (mainly on the West Coast) fell sharply on the news. European banks also feel the pressure when stock prices fall, and even larger banks like Bank of America and JPMorgan have seen their shares fall.
However, the correct way to view this situation might be that the contagion has already spread; The failure of Silvergate and SVB will not ruin the economy, they will fail because the economy is already ruined.
It’s tempting to dismiss Silvergate’s failure as an isolated case given its association with crypto, but as we’ve written on Motherboard, crypto is actually deeply connected to movements in the broader economy. It’s just more vulnerable, reckless and less safeguarded than the rest of the economy, meaning shocks to the broader system tend to hit there first. Yes, FTX went bust because it was supposedly being run like a free-running treasury for cowardly gamblers, but the money was lost because crypto markets crashed in the first place. Similarly, while Silvergate served its own niche industry, it is part of the same trend affecting SVB as the tech downturn is also related to broader economic realities. And when these banks’ core industries falter, when customers start frantically withdrawing their money, they hit the brick wall of the current financial landscape.
So what does all this mean? Many analysts are now eyeing small and mid-sized regional banks across the country, which include both Silvergate and SVB. As Bloomberg noted, these small banks tend not to be as closely watched by regulators as the big players, and they tend to have a less diversified funding stream, leaving them more exposed to volatility.
“Silicon Valley Bank is just the tip of the iceberg,” Christopher Whalen, chairman of financial advisory firm Whalen Global Advisors, told Bloomberg. “I’m not worried about the big ones, but a lot of the little ones are going to get a terrible kick.”
Simply put, these banks are medium dominoes, not the first ones. We’re seeing signs of more dominoes looming everywhere lately, including automaker GM’s plans to cut the “majority” of its employees as it anticipates another economic downturn while making capital-intensive investments in manufacturing operated by electric vehicles.
For the time being, most experts do not seem to see the current situation as an existential risk for the US economy. Not every bank has a customer base focused solely on scratched industries.
But the point is, rather than being the cause of a meltdown, the SVB and Silvergate collapses are symptoms of a meltdown that has already occurred and could well be getting worse.
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