Silicon Valley Bank’s parent company has recently become the second-largest financial institution to fail in the history of the United States. Despite this alarming news, it is worth noting that depositors have been safeguarded against any financial losses. This action starkly contrasts previous instances where customers of failed cryptocurrency firms suffered significant losses.
Following the 2008 global financial crisis, the U.S. government, in collaboration with regulators, has strengthened its control over the financial system to prevent a recurrence of that calamity. As a result, banks and other financial institutions have been effectively restrained from taking excessive risks, particularly with the funds deposited by their customers.
Primarily, Silicon Valley Bank allocated its customers’ deposits into secure assets such as the United States government treasuries. The predicament arose as it invested in long-dated maturities that yielded minimal returns. Consequently, with the swift surge in interest rates in the previous year, the price of these bonds started to decline since bond prices and yields are inversely proportional.
Concurrently, Silicon Valley Bank was encountering a deposit crunch because its clientele mainly comprised technology companies, which were depleting their cash reserves due to the unfavorable economic situation and receiving less venture capital to restore their balances. Consequently, the bank had to sell off a portfolio of Treasuries at a loss of about two billion dollars to guarantee adequate cash reserves to fulfill its requirements of depositors.
The bank’s customers became anxious about its stability. When the bank’s endeavor to secure over two billion dollars in capital to reinforce its financial standing fell through, depositors started withdrawing their funds rapidly, initiating a bank run. The prevalence of smartphones facilitated the rapidity of this occurrence.
Customers Unaffected as Bank Collapses
To safeguard customers’ deposits worth one hundred and seventy-five billion dollars, the Federal Deposit Insurance Corporation promptly intervened to shut down Silicon Valley Bank.
While depositors with balances of two hundred and fifty thousand dollars or lower were already insured, the government chose to take an additional step and guarantee all deposits to allay concerns of contagion.
As previously stated, due to the regulations in place, Silicon Valley Bank possessed assets of comparatively high quality. Therefore, there might not be a significant deficiency in reimbursing depositors after the situation stabilizes. According to the FDIC, the financial assets were valued at two hundred and nine billion dollars during the downfall.
Despite the closure of the bank last week Friday, customers were able to retrieve all their funds the following Monday, thanks to the assistance of the government and the Federal Deposit Insurance Corporation’s intervention.
Unfortunate Fate of Crypto Companies’ Customers
The pitch of cryptocurrencies is enticing as they operate independently of the fiat monetary system and regulations. Moreover, with a finite supply, tokens like BTC cannot be endlessly printed, mitigating the risk of debasement. This aspect of the equation holds some merit.
However, comparing the scenario mentioned earlier at Silicon Valley Bank with the collapse of numerous cryptocurrency-focused exchanges, projects, or tokens in recent years, it becomes evident that a lack of oversight is only sometimes beneficial.
The latest and most severe illustration is that of FTX, a cryptocurrency exchange that operated within a regulatory environment that was relatively lenient in the Bahamas. This situation enabled FTX to engage in careless transactions using funds belonging to customers, with minimal consideration for the associated risks and no immediate safeguards to prevent such actions.