The situation at Silicon Valley Bank (SVB) is not particularly complicated. In short, they borrowed short and invested long, mismanaged their liquidity, and caused their own demise. The specific steps were as follows: low-interest deposit-taking, overzealous investment in Mortgage-Backed Securities (MBS), short-term liquidity gaps, forced selling of assets, and market panic.
Low-interest deposit-taking: Between 2020 and 2021, due to the Federal Reserve's extended period of 0% interest rates, there was a huge financing boom in the tech industry, with a significant portion of cash flowing into SVB. SVB's deposit liabilities surged from $61.8 billion at the end of 2019 to $189.2 billion at the end of 2021, with interest rates on this portion of deposits only around 0.25%.
Overzealous investment in MBS: With so much low-interest money, SVB naturally engaged in carry trade. Typically, banks focus on lending, but SVB invested a large portion of its funds in MBS. Their financial statements showed they held $13.8 billion of MBS at the end of 2019, which had grown to $98.2 billion by the end of 2021. In other words, over 65% of the deposits they took in went towards buying MBS.
Short-term liquidity gap: Normally, investing in MBS is not a problem because they can be redeemed at maturity. But SVB's problem was that it held too many MBS and had too few short-term liquid assets. In today's high-interest rate environment, tech companies are struggling to survive and are gradually withdrawing money from their deposits, causing SVB's liquidity pressures to soar.
Forced selling of assets: To solve the liquidity problem, management chose the cheapest option, which was to sell their MBS holdings. But now, market interest rates had increased from nearly 0 to 5% for 2-year Treasury bonds, and asset prices had fallen significantly in sync. Selling $21 billion of assets resulted in an $1.8 billion loss.
Market panic: For SVB, the $1.8 billion loss was still manageable because their shareholder equity was $16 billion. However, the problem was with the $100 billion of MBS that they had not yet sold. If there was a run on the bank, this could result in a potential loss of $15 billion, causing SVB to go bankrupt. Therefore, there was a great deal of panic in the market, causing the stock price to plummet by 60% in a single day.
SVB has now declared bankruptcy, and the US government has intervened. It is being managed by a specialized institution.
When a bank of this size collapses, there are bound to be chain reactions. The institutions known to be affected include Circle. For those who invest in stocks, they may not have heard of it, but those who invest in cryptocurrencies certainly have, as the most famous stablecoin, USDC, is issued by Circle. The total amount is $40 billion, and in today's announcement, they revealed that $3.3 billion of their assets were stuck in SVB, accounting for almost 8%.
This means that those who invest in cryptocurrencies suddenly find that their $100 has shrunk to $92. To say that it's a seismic event is not an exaggeration.
There are likely dozens of institutions of a similar scale to Circle that are also trapped, but for various reasons, they are not disclosing their situation. We'll have to wait and see when they come forward.
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"Overzealous investment in MBS: With so much low-interest money, SVB naturally engaged in carry trade." The start of the downfall.
Snagma
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They didn’t declare bankruptcy.. that is false. They collapsed and were taken over by FDIC
snipdapipz
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Thanks for the explanation. I’ve been searching all over and no where else could I find such a precise, easy to read explanation.
michaelkingzmen
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If Circle were to cover the funds shortfall caused by Silicon Valley Bank's collapse, it could potentially bring several benefits to the digital currency industry:
Boosts Confidence: The move by Circle to cover the funds shortfall caused by SVB's collapse would demonstrate a willingness to support the stablecoin and reassure investors of the company's commitment to maintaining the stability of the USD Coin. This could boost confidence in the digital currency industry as a whole and encourage more people to invest in it. Establishes Credibility: If Circle covers the shortfall, it could establish credibility as a responsible and reliable player in the digital currency industry. This could encourage other companies to follow its lead and take similar measures to ensure the stability of their stablecoins and the broader digital currency market. Increased Adoption: If the move by Circle to cover the funds shortfall is successful and inspires confidence in investors, it could lead to increased adoption of stablecoins and digital currencies. This, in turn, could increase the liquidity and use of these digital assets, which could have a positive impact on the digital currency industry as a whole. Positive Regulatory Attention: If Circle steps up to cover the funds shortfall, it could attract positive regulatory attention and demonstrate the industry's willingness to be accountable and transparent. This could help to foster a more positive regulatory environment for digital currencies, which could encourage further adoption and investment in the industry.
Overall, Circle covering the funds shortfall caused by SVB's collapse could be a positive development for the digital currency industry, potentially boosting confidence, establishing credibility, increasing adoption, and attracting positive regulatory attention.
Circle is a financial technology company that provides digital currency products and services. In the context of the event you described, Circle is the issuer of the USD Coin stablecoin that was impacted by the collapse of Silicon Valley Bank (SVB).
Circle has been involved in the digital currency industry since 2013 and has played a significant role in developing and promoting the adoption of stablecoins. The company has partnerships with various banks and financial institutions and has been working to provide a more regulated and trustworthy digital currency ecosystem. In the situation described, Circle's USD Coin was impacted by the collapse of SVB, where a significant portion of its reserves were held. As a result, the stablecoin lost value, and there was a shortfall in funds. Circle has called for the continuity of SVB and stated that it will follow guidance from regulators.
michaelkingzmen
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In simple terms, the article is reporting that Circle's USD Coin, a stablecoin that is supposed to be pegged to the US dollar, lost its value and fell to a record low after it was revealed that nearly 8% of its reserves were tied up in Silicon Valley Bank (SVB), which collapsed and was shut down by regulators. SVB's collapse was caused by its sudden need to raise $2.25 billion to shore up its balance sheet, which led to customers withdrawing $42 billion of deposits and the bank failing to scrounge enough collateral from other sources. This is the largest US banking failure since the 2008 financial crisis.
From a big picture point of view, the article highlights the vulnerability of stablecoins and banks to runs and sudden collapses. It also indicates that the cryptocurrency industry is still picking up the pieces after the sudden collapse of FTX last year, and USDC's break with the dollar could signal more trouble ahead.
From a small picture point of view, the article reports on the specific situation of Circle and its USD Coin, which has lost value due to the collapse of SVB, where a significant portion of its reserves were held. Circle has called for the continuity of the bank and stated that it will follow guidance from regulators.
From a system point of view, a complete reconstruction of the financial institution would require addressing the issues that led to the sudden collapse of Silicon Valley Bank. This could involve examining the bank's lending practices, risk management, and liquidity management to ensure that similar situations do not occur in the future. It could also involve enhancing the regulatory framework for banks to prevent such incidents from happening in the first place.
From a timing point of view, it is difficult to provide a specific timeline as the article does not provide any information on when the reconstruction of the financial institution would take place or what steps would be involved. However, it is clear that time is of the essence, given the significant withdrawals of deposits and negative cash balance reported in the article. Therefore, a prompt and efficient response is crucial to stabilize the situation and restore confidence in the banking system.
Vayzee
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Well the big banks got bailed out as usual
Snagma
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@Vayzee nope, the bank wasn’t bailed out, the depositors were. Huge difference
Vayzee
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@Snagma, little late but i doubt the retard joe biden wont bail out svb when its all said and done look at the past. america is a joke
michaelkingzmen
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Yea than what happens next is they get bought out by the QFS. That’s what happened to FTX