The sudden collapse of 4 US banks in the past weeks has raised many questions about startups in technology, venture capital, the cryptocurrency industry, the global capitalist system in general, and regulations in place during financial crises.
The beginning of the collapse
Silvergate, the first U.S. banking institution to suffer financial difficulties, announced on March 8 that it was ending operations due to heavy losses in its loan portfolio.
The internal collapse of cryptocurrency exchange FTX in late 2022, which was the second largest exchange in the world by day-to-day transactions, primarily led to the collapse of Silvergate because FTX was a major customer of the bank.
On the same date, Silicon Valley Bank (SVB) reported financial difficulties, surprising the financial world and investors in the United States, where the bank was seen as a strongly capitalized institution.
Located in Santa Clara, California, the heart of the U.S. technology district, Silicon Valley Bank is the largest bank in Silicon Valley based on domestic deposits and among the largest in the country.
The bank has been a major source of venture capital to fund private startups, mostly in technology, with huge growth potential similar to Microsoft, Apple and Google.
The Silicon Valley Bank's collapse began in late February 2022 when some senior officials withdrew their shares.
It was later announced that CEO Gregory Baker, Chief Financial Officer Daniel Beck and Chief Marketing Officer Michelle Draper would sell their shares worth $4.5 million from the bank's parent company Silicon Valley Financial Group.
When the bank sold its $21 billion bond portfolio at a loss of $1.8 billion, and Baker announced the bank would sell its entire portfolio of securities, panic gripped Wall Street and the U.S. financial industry.
By the end of 2022, the bank had about $209 billion in total assets and about $175.4 billion in total deposits, and it was unusual for a well-capitalized institution to suddenly collapse.
In less than 48 hours, the share price of the bank's parent company fell by more than 60%, while trading was halted several times due to high volatility.
Silicon Valley's largest lockdown
Amid the sudden collapse, the bank was immediately shut down by U.S. regulators, and the California Department of Financial Protection and Innovation designated the Federal Deposit Insurance Corporation (FDIC) as the bank's recipient.
The Federal Deposit Insurance Corporation initiated the establishment of the National Deposit Insurance Bank of Santa Clara (DINB) to protect insured depositors, while immediately after closing it transferred all insured deposits from Silicon Valley Bank to the National Deposit Insurance Bank.
It was the biggest failure for a U.S. financial institution since the collapse of the Bank of Washington at the height of the 2008 financial crisis, which was triggered by a U.S. housing bubble that was initially built on high-risk mortgages and later created fallouts, such as toxic collateralized debt obligations, which overvalued insignificant-rated assets for more profits.
As the 2008 US financial crisis turned into a global disaster, what investors fear most about the Silicon Valley Bank collapse is its growing and potential impact on the possibility of other US banks collapsing.
More Collapses
New York's Signature Bank, which has $110 billion in assets and a total capital of $8 billion, got into trouble when panicked customers began withdrawing their deposits.
The bank was shut down by the New York State Department of Financial Services on March 12 after the bank showed it was unable to improve its financial situation before Monday morning, March 13 and return to financial transactions.
AS PANIC TURNED INTO A FULL-BLOWN SELL-OFF, SHARES OF FIRST REPUBLIC BANK, A FULL-SERVICE BANK AND WEALTH MANAGEMENT FIRM, BEGAN TO FALL MORE THAN 20% ON March 15.
In less than 24 hours, 11 major U.S. bank giants pumped in $30 billion in deposits to bail out First Republic.
Who is responsible?
Sudden crises require immediate scapegoating, and after the rapid collapse of 4 banks in the United States, attention turned to leadership positions in those banking institutions.
Many analysts have blamed poor management, effective leadership, corrupt management practices, and the inability of senior executives to predict the potential impact of the disruption in the cryptocurrency market last year.
In his speech after the bank crash, President Joe Biden assured that the U.S. banking system and depositors were safe, pledging on March 13 that taxpayers would not bear any losses.
He stressed that investors and banks will not be protected as they took risks on purpose, and when this risk does not pay off, investors lose their money. This is how capitalism works.
Biden was vice president under former President Barack Obama's administration, which weathered the rubble of the 2008 financial crisis and adopted tougher financial regulations on Wall Street.
Is the Federal Reserve responsible?
Many banking crises have occurred in the United States in more than 100 years, and each time banks or large corporations swallow smaller bankrupt private institutions.
When New York-based bank Lehman Brothers, which had more than $600 billion in assets, filed for bankruptcy in September 2008, Britain's multinational bank Barclays took over its investment banking.
The US Federal Reserve, which controls the total supply of dollars in the world, has made two major steps in the past three years, including suddenly injecting $ 5 trillion into the US economy during the coronavirus pandemic, causing inflation rates to rise and raise interest rates very quickly to reduce inflation that jumped to a 40-year high.
The Fed's monetary tightening policy last year saw interest rate increases of 425 basis points on 7 occasions, followed by another 25 basis point rate increase on February 2022, 4, which carried the target range for its federal funds rate to 5.4% and then to 75.2007%, marking the highest level since October <>.
On Wednesday, interest rates were raised for the ninth consecutive time by 25 basis points to a range of 4.75%-5%.
Cash, Liquidity and Bonds
Many economists firmly believe that the Fed moved too fast and too fast in raising interest rates, pulling too much money out of the global supply of dollars, leaving the U.S. economy without enough liquidity for new investment, especially in technology.
The safest and most common investment action by banks under strong monetary tightening is the purchase of US government-guaranteed Treasuries.
Because bonds carry a low risk of default by the US government, they have a fixed interest rate but with a small return.
As tech startups were in dire need of liquidity last year due to declining ad-based revenue, venture capital funding is drying up, causing banks with significant technology investment like Silicon Valley Bank to see their customers withdraw deposits more and more.
Large withdrawals ultimately result in any bank selling its own assets in order to meet customer withdrawal requests.
As a result, Silicon Valley Bank was forced to sell so-called safe bonds at a loss, leading to the bank's bankruptcy, the point at which the bank is unable to repay depositors because its liabilities are greater than the assets it owns.
What's more?
All financial crises, whether during the Great Depression of 1929, the Great Recession of 2008, or the bursting of the dot-com bubble of 2000, showed the need for more stringent government regulations and oversight.
But corporations, banks and private institutions are strongly demanding Adam Smith's "invisible hand", which means that independent actors act for their own self-interest in the free market without any government interference, claiming that would be better for society as a whole.
Investors are also seeking huge profits on investments of very small amounts, with an unrelenting thirst for risk appetite, which sometimes paves the way for sudden collapse – just as in the recent bank crash.
Although the current banking crisis in the United States immediately requires action to prevent the domino effect and stave off the failures of other banks in the country and around the world, the solution to this problem must ultimately address the more fundamental causes and effects to serve as a lesson to capitalism and improve the dominant economic system of the twenty-first century.
Despite all the booms and busts of the past 100 years, we cannot shake off the contemporary and interconnected global economy and borderless financial system as it addresses our immediate consumption needs and overdependence.
There will always be new technology, new startups, new risks and rewards, but what will remain the same is the clash between the appetite of the risk-loving human and the regulations needed to provide balance.