The crypto industry was still recovering from Wednesday’s voluntary liquidation of its preferred bank, Silvergate, when the next domino fell. On Thursday, startups and venture capitalists began to flee in droves from Silicon Valley Bank as its share price plummeted. By Friday, the Federal Deposit Insurance Corporation had placed SVB into receivership, marking the bank’s official failure.
Amid Silvergate’s descent, many crypto companies had moved their funds to Signature Bank, but even it seemed shaky on Friday as its shares decreased over 20% and trading was halted. Even as many onlookers worried about Silicon Valley Bank’s potential contagion hitting the crypto industry, financial experts said it was unlikely.
Austin Campbell, an adjunct professor at Columbia Business School and managing partner at blockchain-focused Zero Knowledge Consulting, said that the current run of bank failures is more related to structural issues than liquidity risks posed by crypto.
Silvergate had built its business around the crypto industry, with about 90% of its deposits coming from digital asset companies. With the collapse of client FTX and the worsening bear market, its customers began withdrawing deposits in droves. After the Federal Home Loan Bank of San Francisco called back its $4.3 billion assist, Silvergate was forced to sell off securities that had not yet matured, including bonds and Treasuries, at a loss, exacerbated by the Federal Reserve raising interest rates.
“In a normal world, this is not a problem, because as long as your deposits don’t leave and you’re not a forced seller, you just wait until things mature,” Campbell said. “The way that becomes a problem for banks is when all the deposits leave.”
Because Silvergate had a concentrated deposit base of crypto companies, it suffered from an exodus of clients from a single industry combined with suddenly devalued holdings. Silicon Valley Bank, which mainly served tech startups and venture capital, faced a similar issue, leading to its rapid failure.
What’s next for Signature?
With all eyes now on Signature, Campbell said the bank is less likely to have the same structural weakness thanks to a more diversified deposit base. Even though shares are declining, Campbell said that it could even be in a stronger position given the recent inflow of deposits from Silvergate.
John Popeo, a former lawyer at the FDIC, analyst at the Federal Reserve Bank of Boston, and current partner at the Gallatin Group, warned that Signature could still be vulnerable, especially as more crypto companies rush in, given the lack of other options. In December, Signature announced it would shrink its deposits tied to crypto, with its CEO announcing that it was “not just a crypto bank.” The new flood of clients could be a reversal.
“It’s an unfortunate consequence of being one of the few institutions willing to bank a particular industry,” he told Fortune.
Still, Popeo said that the growing string of banking failures is more of an industry issue than a crypto one, pointing to how energy-exposed banks failed during the savings and loan crisis of the 1980s and 1990s.
“It’s the same story that’s been told once before, where a bank fails to diversify its funding and liquidity sources,” he said. “There are consequences to pay, unfortunately, in a less-certain rate environment.”
Joseph Silvia, former counsel to the Federal Reserve Bank of Chicago and Dickinson Wright partner, echoed that sentiment, arguing that the fundamentals of the Silicon Valley Bank failure do not indicate broader contagion, but have more to do with how it invested its deposits.
As of now, the crypto firm with the greatest degree of exposure to Silicon Valley Bank appears to be Circle, which placed an undisclosed amount of its reserves at the California-based bank. A spokesperson didn‘t immediately reply to a request for comment from Fortune.
Update 3/19/23: An FHLB spokesperson told Fortune, “FHLBank San Francisco did not request or compel Silvergate Bank to prepay its outstanding advances. Silvergate made their determination to prepay their outstanding advances based on their own assessment of their position. We can’t speculate as to what went into their final decision to prepay, however, the existing tenure of their remaining advances before the prepayment was short term.“
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