Three bank crashes in three days

After a 68 percent drop in deposits at the end of 2022, and a 48 percent workforce layoff in January, Silvergate Capital, a major lender in the crypto industry, announced on Wednesday that it would be liquidating and winding down operations. Its stock dropped 36 percent in after-hours trading. On Thursday, Silicon Valley Bank (SVB) saw a similar run on its deposits, which center mainly on servicing the tech startup industry. The Federal Deposit Insurance Corp (FDIC) announced closure and seizure of its remaining deposits on Friday: the largest US bank failure since the global financial crises of the late 2000s. That same day, Signature, Silvergate’s fellow major bank in the cryptocurrency industry, ended 23 percent down: a spillover effect from surrounding panic, with traders hurrying to bet against any related firms.

Silvergate held over 11 billion in assets, and once had FTX, the now-bankrupt crypto exchange, as a major customer. Silvergate’s payments platform was discontinued last week, when it also hinted at viability issues caused in part by industry-wide expectations of a regulatory crackdown from the Department of Justice, the Federal Reserve, and the California Department of Financial Protection and Innovation. One red flag for lawmakers was its recent appeal for $4.3 billion from the Federal Home Loan Bank, which as Senator Elizabeth Warren noted “further introduced crypto market risk into the traditional banking system.”

Silicon Valley Bank not only serviced higher risk tech startups in North America, but also in Europe, Israel, and parts of Asia including India. Its clients include half of all US venture-capital backed startups, and over 500 cybersecurity outfits. Many of these firms are now scrambling to figure out payroll and other everyday expenses, with some uncertain how they will survive the next month. The FDIC will reopen the bank on March 13 to insured depositors, but only 11 percent of the bank’s $175 billion in deposits were insured as of late 2022. The FDIC plans to aid some of the uninsured by selling SVB assets and offering up future dividend payments to those affected.

The run on SVB was also informed by regulatory pressures. On Wednesday, the bank had noted that it was also looking to raise money: a major concern at a time when central banks like the Federal Reserve are looking to reduce inflation by cutting access to too-easily generated money (which usually arises from riskier confidence games in the market). As SVB assets are sold off by the regulator, tech and banking experts worry that this crash will create a vacuum in loaning agencies with the experience and interest in investing in early-stage ventures.

Signature then joined a few other banks on Friday, including First Republic and PacWest Bancorp, in seeing stocks frozen at points during end-of-week trading: a move intended to avoid freefall during classic market runs. Next to Silvergate’s $11 billion in assets, Signature’s $114 billion would mark a more far-reaching and devastating loss, which makes its drop of 23 percent on Friday a serious concern. Fortunately, Signature confirmed this week that it has a much more diversified portfolio, of which crypto investment makes up a smaller overall component. As co-founder Joseph J. DePaolo wrote, “As a reminder, Signature Bank does not invest in, does not trade, does not hold, does not custody and does not lend against or make loans collateralized by digital assets.”

This will be key for any efforts to stabilize the current system, because ongoing depreciation of market confident in crypto is expected to continue, even as some blockchain firms welcome the increase in overall regulation for their industry. As Meltem Dimirors of CoinShare recently told the digital assets news service The Block, “There is nothing really stopping a bank from banking a crypto company, but your bank regulator is going to come look at your books more frequently—let’s say every six months instead of every 12, and that makes your life more difficult and drives up compliance costs. So unless a crypto firm is a really big revenue generator, the juice isn’t worth the squeeze for many banks.”

For now, the fortunes of traditional and crypto markets are intertwined. Other losses in a 24-hour period included 2 percent down on Nasdaq, similar from Amazon, Apple, and Google, and 5 and 6 percent respectively for JP Morgan and Bank of America. Bitcoin and Ethereum also registered 10 percent drops within that volatility. Weekly performances also suffered, too.

But the crises for these and other financial lenders is not simply a numbers game, which is where a more humanist approach to this news is required. What we’re really talking about—always talking about, in the world of finance—is human confidence: either directly in the markets, which trades on optimism in one’s ability to invest and seek investment from stable institutions, or else in one’s ability to capitalize quickly on the assumption of an impending market failure.

One would think that secular folks, especially those of us who pride ourselves on critical thinking, would be less susceptible to confidence games playing on product, charismatic leader, and market hype. Not so, as recent moves in both the digital assets and the general tech industry have shown in abundance. But there’s always an opportunity, especially amid so much recent banking instability, to reflect on the gaps in human behavioral savvy that have brought our shared markets to these precarities. Certainly, ongoing COVID-19 fallout and Russia’s war in Ukraine have not helped Western economies to avoid inflation pressures, which in conjunction with reckless crypto exchange actions have led to increased regulatory crackdowns (even if the problem of “Ponzinomics” also runs government-agency deep).

But underpinning all these sites of economic friction is the same, hard reality that our current systems are not adequately serving a strapped populace and growing rich-poor divide. Wherever economically stressed human actors see an opportunity to get ahead quickly, there is a strong chance that they will take it. The challenge is not simply to knock back too-risky opportunities in an endless game of regulatory whack-a-mole: it’s to build a system stable enough to circumvent that self-serving—and sometimes whole-industry-destabilizing—human impulse at its source.