In recent days banks are falling, but crypto is raising, so raising incomes of the exchanges and crypto world in common.
The withdrawal of three US banks from the market at once will hurt startups and the crypto industry, but the global impact, they say, will be limited
The bankruptcy of the largest US bank in the last decade, the Silicon Valley Bank, as well as the withdrawal from the market of two smaller financial institutions - Silvergate Capital Corp and Signature - catalyzed talk of the threat of a global world crisis, which allegedly hung over the world like the sword of Damocles. Financiers fear that the collapse of institutions could trigger a chain reaction like the one that occurred after the bankruptcy of Lehman Brothers and triggered the global financial crisis of 2008-2009. The problem is really serious, there are risks. But, first of all, even the joint influence of three "newly introduced" financial institutions, focused primarily on the field of startups and the crypto industry, cannot be compared with the importance of one of the leading investment banks in the world at that time - Lehman Brothers. And, secondly, American regulators and the US government took into account the lessons of previous crises and promptly took precautionary measures. They work in a short step. Although, of course, it is too early to judge their effectiveness and ability to "nip the crisis in the bud". The so-called psychological factor has too much influence on the banking sector. Each new negative news for investors can fan the flames.
Over the past week, three banking structures focused on serving the crypto industry and startups - Silvergate Capital Corp, SVB Financial Group and Signature - have been withdrawn from the market in the USA.
The "first swallow" was the March 7 closure (voluntary relinquishment of the license) of the Silvergate bank, which focused on serving crypto counterparties. Including, the largest US crypto exchange Coinbase was among its clients. Actually, such a narrow specialization became the main cause of bankruptcy. The bank did not keep deposits in its portfolio in the usual sense for us — as term deposits of individuals and legal entities. Instead, he used funds from the current accounts of crypto market players. And until recently, the balances on such accounts were considerable, which allowed Silvergate to earn from lending to other market participants.
But the crypto industry, as you know, is not going through the best of times. Last year, most cryptocurrencies depreciated sharply. For example, the most famous of them — bitcoin at the beginning of the summer fell to the lowest values for the last few years — below $20 thousand. The influx of new investors into the crypto industry has slowed. Against the background of the crisis, the same Coinbase in June of last year announced the dismissal of 18% of employees. And although "Bitcoin and company" periodically regained what they had lost, their exchange rate against traditional currencies increased for a short time, but the medium-term trend was negative. This is explained by high volatility, because investors massively withdrew from risky assets, fearing a recession. Fears (and the real steps of the American regulator) that due to high inflation the US Federal Reserve System will actively raise key rates also played a role. So there were less and less free funds left on the current accounts of the subjects of crypto relations. Accordingly, banks focused on servicing this area were losing a free resource. And the problem would not be so acute if earlier, in better times, the lion's share of money from the accounts of the banks' customers was directed to lending. But they, preferring not to take risks once again, invested money in reliable medium-term mortgage and long-term government securities. Permanent increase of interest rates by the Federal Reserve System devalued these securities.
Silicon Valley Bank (SVB), which served another progressive industry — the startup industry — fell into the same trap. He also lived at the expense of current accounts (deposits) of clients, who for a long time rolled like cheese in butter, having a lot of free funds. It is not surprising that they kept more than $200 billion in current accounts at SVB (this is more than last year's GDP of Ukraine). But this industry has also suffered a lot recently. There was little circulating resource for current activities, the flow of investors decreased, startups lost the opportunity to cheaply attract resources on the stock market through the issue of shares. So now they are forced to spend resources from current accounts. And the situation with SVB's loan portfolio is the same as in Silvergate — the focus is on reliable government securities, which were constantly depreciated due to the decisions of the Fed.
On the morning of March 10, financial regulators in the state of California announced the introduction of a temporary administration at Silicon Valley Bank. Adding fuel to the fire of panic was the fact that the Federal Deposit Insurance Corporation (FDIC) guarantees reimbursement of only deposits up to $250,000. And this is only a “modest” 8 billion “greens”, the fate of the remaining more than $150 billion, which at the time of bankruptcy was kept in bank accounts, remained uncertain, depositors could either lose their money altogether, or hope that the FDIC would sell the bank to a strategic to an investor who will assume all the obligations of SVB, or to wait (which is more likely) until the bank's assets are sold off in parts.
The situation caused considerable concern. After all, unlike the small Silvergate, SVB was among the TOP-20 (16th place) US banks. In addition, Silicon Valley Bank was generally considered the "#1 bank" for technology companies, venture capital funds and startups.
The icing on the cake was the closing on Sunday by US financial regulators of the New York-based Signature Bank, which was also (like Silvergate and partly SVB) a creditor to the crypto industry. Explanation: preventing the spread of a banking crisis. After all, last Friday, the bank was engulfed by an avalanche of deposit outflows, provoked by the situation in SVB. And although everything seemed to have stabilized by Sunday, the regulators decided not to take any risks. The US Federal Reserve said it had lost faith in the bank's management after the financial institution failed to disclose "reliable and consistent data" about its performance. The search for a buyer for Signature Bank has begun.
Crisis, stop - one or two: the reaction of the US authorities
According to experts, regulatory bodies and the executive power of the USA as a whole took into account the lessons of the 2008-2009 crisis. The reaction to negative signals for the American and global banking systems was quick. In particular, almost immediately after the withdrawal of SVB from the market, the United States guaranteed the preservation of private depositors' deposits. It is also important that for the first time in the history of the country, the decision to introduce a temporary administration to the bank was made immediately, as soon as the situation in the financial institution worsened. Usually, the FDIC takes such steps on a Friday night, so that during the two weekends, when stock market trading does not take place, the panic subsides at least a little.
The US Federal Reserve also decided to provide additional funding to support the banking system after the exit of Silvergate, Silicon Valley Bank and Signature Bank. "This will strengthen the banking system's ability to protect deposits and ensure the continuous supply of money and credit to the economy," the Fed said in a statement. To provide banks with additional liquidity, a new Bank Term Funding Program (BTFP) will be created, which will offer loans of up to one year to banks, pension funds, credit unions and other institutions secured by US Treasury obligations, agency debt obligations and so on. These assets will be valued at face value. To support the financing of the program, the US Treasury Department will provide up to $25 billion from the Exchange Stabilization Fund.
The Fed and the US Treasury assured that the US banking system is now much more stable than it was in 2008.
President Joe Biden even addressed the Americans. In an emergency appeal, he assured citizens that the country's banking system is safe. Also, the head of the White House emphasized: in the future, the authorities will prevent the recurrence of such situations, and he will demand stricter regulation for banks.
In addition, on Monday, March 13, one of the largest European banks, the British HSBC, bought the local "daughter" of Silicon Valley Bank for 1 pound, which was first reported by the Financial Times. Such a move, among other things, made it possible to avoid the need for interventions from the UK Government to protect depositors.
And while the situation with SVB is gradually calming down (barring the aftershocks affecting the stock markets), the Signature Bank story seems to be only gaining momentum. Bloomberg, citing knowledgeable interlocutors, reported that before the collapse, the financial institution was under investigation by the US regarding possible money laundering by some clients.
Meanwhile, the Justice Department is also investigating Silvergate's activities in connection with the FTX operations of Sam Bankman-Fried and Alameda Research. And in this case, the consequences can be quite serious.
The first consequences: startups are in despair, "crypto" is successfully maneuvering, stock markets are at a fever pitch
The bankruptcy of Silicon Valley Bank put a large number of startups on the verge of survival and, apparently, slows down the emergence of new innovative projects, undermining the confidence in them of potential investors who will prefer to invest in quieter havens. It also immediately triggered a collapse in the stock markets. The key NASDAQ and S&P 500 indices fell by 4-5%. The pressure on the crypto industry, which has not yet recovered from the Silvergate market exit, has also increased. After all, part of the market players kept funds in SVB as well.
Using this example, we are once again convinced that "money loves silence." That is, the subjective factor and panic moods significantly affect the financial sphere - regardless of whether it is global, or regional and national markets. And this vulnerability is quite easy to use if desired. And not only with a good purpose. Often, the effect is reminiscent of the well-known anecdote about the spoons that were found and the sediment that did not go anywhere.
Despite the guarantee by the United States of America that deposits in the SVB bank will be kept, which should reassure investors, the current week began with a fall in the shares of leading banks and other players in the financial sector around the world. According to Reuters, the European banking index STOXX fell 5.8% on Monday. Germany's Commerzbank lost 12.7% and Credit Suisse shares hit a new record low after falling more than 15%. Shares of U.S. banks declined in premarket trading, with Bank of America shares down 3.7%. Smaller banks suffered even more, with shares of First Republic Bank down about 60% and PacWest up to 40%.
At the same time, indicators of credit risks in the US banking system and in the Eurozone grew.
According to experts, the refusal of the US Federal Reserve System to significantly increase interest rates will help calm the situation. The same moderation in changing key rates is expected from the European Central Bank.
On the other hand, the situation with the bankruptcy of American banks had almost no effect on the Chinese stock markets. And this is another argument in favor of the fact that the current crisis will not reach global proportions. This is explained, among other things, by the stricter policy of the Central Bank of the People's Republic of China in terms of interest rate risk management.
Another thing is that it may turn out in the end: the global financial crisis is only postponed, the spring is compressed even more, and any bankruptcy or other "black swan" in the USA or elsewhere in the world can be the impetus for the systemic failure. In particular, there are still risks of a panic reaction on the part of depositors of other American banks. If customers start withdrawing money more actively, financial institutions will have to resort to the same steps as SVB: sell US government Treasuries and absorb losses.
All is not calm in the European banking kingdom either. Analysts call Credit Suisse, the second-largest bank in Switzerland, another contender for high-profile bankruptcy. Since the beginning of March, its share price has fallen by 35%, reaching an all-time low. At the same time, the value of credit default swaps, which provide protection against the bank's failure to fulfill its credit obligations and demonstrate the level of the threat of default, reached a historical maximum. The bank has been trying to reduce expenses and attract additional financing for several months, but it has not been successful so far. The largest shareholders of the financial institution made it clear: they are not going to support it with additional capital injections...
Against the background of financial troubles in the USA and alarming news from the "land of reliable banks" in the world, oil prices fell by 5% - to the lowest level in more than a year. Brent crude fell $3.53 to $73.92 per barrel. American WTI oil lost $3.46 ($67.87 per barrel). These are the lowest figures since December 2021. Concerns about Credit Suisse rattled global markets and dashed hopes for renewed demand for "black gold" in China.
Instead, the cryptocurrency market is recovering quite quickly. Bitcoin returned to growth already on Monday, March 13, reaching $25+ thousand. And on Wednesday, the exchange rate generally set a nine-month maximum - $26,514. The volume of daily trading increased by more than 10% and reached almost $53 billion. In general, the world market of cryptocurrencies grew by 1.74% - up to $1.1 trillion, most of the main coins rose in price.
Is the global financial crisis canceled (postponed)?
Most experts now doubt that the collapse of SVB and two smaller US banks could set off a chain reaction like the one we witnessed after the bankruptcy of Lehman Brothers and which triggered the 2008 global financial crisis.
"The fundamental difference between the situation and the circumstances that led to the withdrawal of American banks from the market is that the 2008 crisis was caused by bad assets on the balance sheets of financial institutions, hidden debts, when one thing was "packaged" into another, and then again and again, so it was impossible to understand what was actually on the bank's balance sheet. In the case of SVB, there were no complaints about the quality of the assets. These are mostly either safe mortgages or US government bonds. Plus quite reliable loans, the bank did not take any extra risks. The decline began due to the fact that his clients began to sharply reduce their account balances. After all, times are not the best for startups now, and the money they collected earlier has to be "eaten", and it is almost impossible to get additional resources, because venture capitalists are reluctant to invest in new projects", - explains Taras Kozak, president of the Univer investment group, in a comment to Ukrinform .
The constant outflow of capital, which accelerated due to the statements of a number of influential investors, eventually led to a mass flight of depositors from the bank. Under such circumstances, no banking institution in the world can survive without the support of the state or the central bank of the country, the economist believes. In order not to repeat the precedent of 2008, the Americans immediately intervened, stopping the destructive processes at the level of several banks. Kozak calls the actions of American regulators correct and timely. They calmed down the situation quite a bit and prevented the rapid spread of the "epidemic" of capital outflow to other banks. Because a few more similar cases could lead to a chain reaction that cannot be stopped.
But the head of the expert-analytical council of the Ukrainian Analytical Center, Borys Kushniruk, believes that in this case it was possible to act more delicately, preserving this bank oriented towards the promising technological sphere and at the same time conservative in its activity and risk policy.
"To be honest, this topic is somewhat controversial for me. In the grand scheme of things, the bank just needed to be given liquidity by the Fed and the situation would have calmed down. Therefore, I have a question, was this not suddenly a deliberate collapse of the financial institution? After all, most of the projects he financed are related to renewable energy. They say it is about covering up to 80% of the American market. If this is so, then maybe someone kept an eye on these businesses and simply helped to "overthrow" SVB?", the economist said in a comment to Ukrinform. The technology is simple. When the Fed began to raise the discount rate, short-term securities turned out to be more expensive than long-term securities, which banks mainly hold in their portfolios. This destabilized the market to some extent. And some rumors turned out to be enough for depositors to start withdrawing money from banks en masse. Especially from those related to high-tech, new projects. When the rapid outflow of deposits begins, the bank, even with good assets, cannot provide liquidity. And starting to sell securities from his assets, he is forced to do so at a significant discount. In the case of SVB, this led to bankruptcy.
"Can it "break through" in another place? I think so. Because the main reason for this situation is a permanent increase in the Fed's discount rate. Further rates of change of this indicator will be a determining factor for the formation or absence of grounds for bankruptcy of new and new financial institutions. Previously, there were expectations that the key rates would increase by another half a percentage point, but now it has become clear that it will be about 0.25% at most. Otherwise, the risks will increase. Because the more the Fed raises the interest rate (up to 5-6% is expected), the greater the losses will be for those who hold long-term securities in their portfolios," says Taras Kozak.
According to Borys Kushniruk, there is currently no reason to say that threats of the collapse of not only individual banking institutions, but of the global market have now formed. "If this is not deliberately played on and if the Fed acts on time. In this regard, the statements of the Fed and the US Treasury about continuing efforts to stabilize the situation and avoid new cases of "bankruptcy" are very important. But the question is: why didn't they do this in the case of SVB? Of course, now there is every reason to talk about the brewing of a large-scale crisis in the world economy. But it seems to me that this is not the case", - Mr. Laments Kushniruk.
However, it may turn out that the crisis, as they say, is not canceled, but only postponed. "Something like this is expected. Because when the Fed, the European Central Bank, the central banks of Japan and other economically developed countries raise interest rates, inefficiency comes to the fore. This means that companies that operate inefficiently (they have low margins or small profits) are at risk of bankruptcy. Because if loans become more expensive, such a margin may not be enough to support current activities. Therefore, the business will become unprofitable. And when the period of high rates drags on, a new crisis will definitely occur. But the very process of bankruptcy of banks in the USA will most likely stop there. If it breaks, then, most likely, in another place", - predicts Taras Kozak.
And although experts are unanimous in their assessment that the situation with American banks will in no way affect the Ukrainian banking system, we must understand: the more financial problems our partners have, the more funds they will have to pour into their economies, the less opportunities they will have to support us in the fight against a brutal aggressor and in post-war reconstruction. Therefore, let's keep our fingers crossed that the actions of Western governments and regulators to minimize the consequences of bankruptcies of financial institutions will be successful.
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