FTX collapse brings down a mainstream bank

[Brendan Burgess]

Is this a first?

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Silvergate, the San Diego-based regional lender that transformed itself into a go-to bank for the crypto industry, plans to wind down operations in the face of turmoil in digital currency markets. Citing “recent industry and regulatory developments”, Silvergate on Wednesday announced that a “voluntary liquidation of the bank is the best path forward”. The disclosure sent its stock down more than 30 per cent in after-hours trading to $3 a share. In the past few years Silvergate had developed into the largest cryptocurrency bank in the US, attracting as much as $14bn in customer deposits and reaching a stock price of more than $200 in late 2021.

I would say a few other bankers might learn from this.

Brendan

 

[tecate]

Lets see....

A fractionally reserved bank died because it engaged in fractionally reserved banking? Ok.

I don't know if it's a first (yeah, it's certainly not!) - but it could be seconded real fast for exactly the same reasons by Silicon Valley Bank. Kind of awkward in that instance as can't blame crypto (not that crypto should be blamed re. Silvergate either but because it was a crypto-adjacent bank, that's enough to smear it and claim 'but crypto')...what to do?


Also , this ->

https://twitter.com/x/status/1633951921751875587

 

[Brendan Burgess]

Don't really follow all that.

Is it something like the following

A bank got involved in a taking deposits of hot air and then got a puncture in one of the tyres and crashed?

Brendan

 

[tecate]

A bank got involved in a taking deposits of hot air and then got a puncture in one of the tyres and crashed?

No. Silvergate is a failure of Federal Reserve-regulated fractional reserve banking - not crypto.

 

[skrooge]

It's annual accounts make for interesting reading*

$14 billion in deposits in 2021 up from $5 billion in 2020. That's a massive increase in such a short period of time.

What's telling is how it sources it "Deposits are the major source of funding for the Company, substantially all of which are derived from our digital currency customer base."

It looks like it took those deposits and invested in a range of fairly vanilla securities. The majority of which has a maturity of 5-10 years. Obviously those bonds are probably under pressure. So the fact that most of its assets are in that class is a bad start.

No. Silvergate is a failure of Federal Reserve-regulated fractional reserve banking - not crypto.

On the face of it it does look like the bank mucked up it's liquidity management/maturity mismatch. Who would have thought a digital currency depositor might be more prone to withdrawing their money faster than the little old granny living round the corner!

Though there is a question as to why were digital depositors in a rush to get their money? Perhaps because the value of the underlying digital currency was collapsing?

You wouldn't expect a bank with long term dollar assets funded in short term Argentinian pesos (held by Americans) to last too long as a going concern and I think that's what's happened here.

*In so far as any annual account does. Don't worry I only read them for the pictures.

 

[tecate]

It looks like it took those deposits and invested in a range of fairly vanilla securities. The majority of which has a maturity of 5-10 years.

On the face of it it does look like the bank mucked up it's liquidity management/maturity mismatch. Who would have thought a digital currency depositor might be more prone to withdrawing their money faster than the little old granny living round the corner!

There we have it - maturity mismatch as the bank, like all banks, pursues fractional reserve banking practices. A bank that gets caught out by central bank interest rate tinkering. A central bank who said at the very same time as this is happening when talking about digital assets, these sort of things would never happen in the banking system because we regulate banks stringently.

Though there is a question as to why were digital depositors in a rush to get their money? Perhaps because the value of the underlying digital currency was collapsing?

Not the case - have a look at digital asset pricing as all of this was going down. Prices were going up, not down in that timeframe. Even though that wasn't the reason for the run, it doesn't matter what the reason for the run was. Runs have happened historically for all sorts of reasons. If fractionally reserved, then its always going to be an issue.

You wouldn't expect a bank with long term dollar assets funded in short term Argentinian pesos (held by Americans) to last too long as a going concern and I think that's what's happened here.

The only funding we're talking about here is in US dollars - and it goes back to the maturity mismatch and the price the bank paid for that maturity mismatch.

 

[NoRegretsCoyote]

From today in the FT:

Late on Wednesday, SVB revealed it had lost roughly $1.8bn following the sale of a portfolio of securities valued at $21bn, which it offloaded in response to a decline in customer deposits. The losses prompted the bank to announce a share sale to shore up its capital position.

I think this is just an old-fashioned maturity mismatch issue. Looks like a bank with poor risk management controls and/or weak supervision.

The steep losses on the sale of the SVB securities shifted investor attention to the risks that might be lurking in the huge bond portfolios held by other US banks, many of which invested an influx of deposits during the coronavirus pandemic into long-dated securities such as Treasuries.

Maybe it's a more general problem, maybe not.

 

[skrooge]

The only funding we're talking about here is in US dollars - and it goes back to the maturity mismatch and the price the bank paid for that maturity mismatch.

Digital currency customer base sounds a bit more than simple internet banking.

Just because the bank reports it in dollar doesn't mean that's what it's denominated in from the depositors perspective.

 

[skrooge]

Maybe it's a more general problem, maybe not.

Compare it to Irish banks. They had a huge pandemic savings boost. They had nowhere to put the influx apart from deposit with the central bank. While it cost them money at the time it was hard to argue with the logic. Who knew how long that money would stay on deposit.

 

[tecate]

Digital currency customer base sounds a bit more than simple internet banking.

Just because the bank reports it in dollar doesn't mean that's what it's denominated in from the depositors perspective.

The bank being crypto-adjacent is certainly related but it is not the reason for the failure. The very same thing is happening right now at Silicon Valley Bank - which is not particularly crypto-adjacent (although it may not be ideally diversified beyond the tech/vc sector). It's a case of maturation mismatch - and again, this can only become a problem in a fractionally reserved banking system.

Crypto users should demand to be protected from the systemic risks in the US banking system.

 

[tecate]

Silicon Valley Bank (SVB) has now been shut down by the regulator.

SVB failing is a much bigger deal it seems:

https://twitter.com/x/status/1634244961800429599

 

[DazedInPontoon]

Crypto users should demand to be protected from the systemic risks in the US banking system.

Worth pointing out, once again, that those of us keeping custody of our bitcoin ourselves are protected from systemic risk of companies and banks. It's a large part of why we bitcoin.

Hey I won't have to pay USC for this one, right?

 

[tecate]

Worth pointing out, once again, that those of us keeping custody of our bitcoin ourselves are protected from systemic risk of companies and banks. It's a large part of why we bitcoin.

I have always agreed with this....although with one or two caveats. While self custody is a major part of the whole point of something like bitcoin, there's a whole industry there and there's a need to trade digital assets. There's also a need to convert digital assets into various forms. Many still can't remove assets from the crypto world into the conventional world as it simply doesn't play nice. That can and has forced some into the use of centralized platforms. Furthermore, there's a lot more work to be done on user experience relative to self custody, the use of decentralized exchanges (DEXs), etc.

While that's still work in progress, it's not reasonable to expect the mass market to immediately take to a decentralized approach and the risks and headaches that come with that. It's often trotted out that crypto doesn't want regulation - which is and always has been an untruth. Whilst sometimes used to serve other agendas, the idea of regulation is supposed to be to protect people. When you have folks - here and elsewhere - saying that digital assets aren't deserving of regulation, later turning around when centralized platforms fail stating these people deserve what they got, I've nothing but contempt for those folks.

Furthermore, the games that are being played by politicians, institutions and regulators have contributed directly to many of the collapses we've seen. Here's one shining, stand-out example (of which there are many).


And despite all of that, decentralized blockchain/crypto will succeed ultimately.

Hey I won't have to pay USC for this one, right?

Capitalism first and foremost, switching to socialism depending on who got caught short.

 

[Duke of Marmalade]

We are told that these recent shenanigans are all to with the wickedness of the fractional reserving system, so central to fiat and so alien to bitcoin. And yet bitcoin is down 10% on the US$ as a result - go figure

 

[tecate]

We are told that these recent shenanigans are all to with the wickedness of the fractional reserving system, so central to fiat and so alien to bitcoin. And yet bitcoin is down 10% on the US$ as a result - go figure

That'd be on account of the systemic risk of banking to crypto.
Meanwhile, the Federal Reserve felt that a fully reserved bank presented with 'significant safety and soundness risks", locking it out of the Federal Reserve system. Much better to let banks hold less than 10% of reserves and have an FDIC insurance guarantee that holds assets that would cover 1.26% of deposits.

SVB was A-rated by Moodys only 72 hours ago. The FDIC Chair is blaming events on the rapid rate rises carried out by the Fed.

 

[Duke of Marmalade]

If "Fractional Reserve Banking" was a person she would be suing some here for defamation. For some reason the crypto cult have selected her as their totem for all that is wrong with the conventional monetary system.
FRB is the practice of a bank holding only a fraction of its liabilities in liquid assets, to meet unpredictable calls from depositors. In the presence of a lender of last resort it is 100% sound.
Where the risks arise is not on liquidity but where a mismatch between assets and liabilities can lead to the value of assets falling below the value of liabilities
My understanding is that the current failures have nothing to do with liquidity - nothing can be more liquid than govie bonds. It was the mismatch that led to the above second form of failure.
Nothing to do with FRB; leave her alone

 

[tecate]

FRB is the practice of a bank holding only a fraction of its liabilities in liquid assets, to meet unpredictable calls from depositors. In the presence of a lender of last resort it is 100% sound.

100% sound? Ok, so the FDIC coming out and saying that depositors with funds beyond the guarantee limit will get some breadcrumbs from the bankruptcy process, that's alright Duke?

It was the mismatch that led to the above second form of failure. Nothing to do with FRB; leave her alone

That's a barefaced lie. You can't have this scenario of depositor money go bye-bye unless someone took those funds and did something else with them.

On the mismatch, do you agree with the FDIC that it was caused by the tinkering of the alchemists at the Federal Reserve, with their steep round of rate hikes?

https://twitter.com/x/status/1634343907827019776

 

[Duke of Marmalade]

@tecate I thought you understood this somewhat. I haven't really the time to draw diagrams. Trust me, FRB is about liquidity and with a lender of last resort it is 100% sound. The reason banks under the watch of the Central banks go bankrupt is because of asset failures, nothing to do with liquidity, of which the Central Bank has an infinite supply, and nothing to do with FRB.
The real High Priests of the cult understand this and target FRB because it is the main cause of the multiple expansion of the monetary base beyond its core reserves. I thought you were a High Priest, what a disappointment.

 

[tecate]

@Duke of Marmalade - You continue with the porkies. There is no loss in either Silvergate or SVB if they weren't engaged in fractionally reserved banking. Its that simple.
100% sound? Again, I invite you to explain that to the SVB depositor who is out of pocket today and to the employees of those depositors who are not going to get paid and not going to have jobs. Then you can do the same routine with the depositors of the next bank this is going to pull down.

 

[Duke of Marmalade]

@Duke of Marmalade - You continue with the porkies. There is no loss in either Silvergate or SVB if they weren't engaged in fractionally reserved banking. Its that simple.
100% sound? Again, I invite you to explain that to the SVB depositor who is out of pocket today and to the employees of those depositors who are not going to get paid and not going to have jobs. Then you can do the same routine with the depositors of the next bank this is going to pull down.

Being as obtuse as you can be on this one.
You are using your own definition of FRB. To you if someone makes a deposit and the bank uses that to purchase a different asset rather than keep it in a vault then that is FRB. To you banks should just be vaults or custodians, not in any way managing the assets which must at all times be identical to what was deposited with them.
It is the mismatch between assets and liabilities which causes bank busts not FRB. But look, if speaking knowledgably about FRB when you haven't a clue what it actually means, massages your cult fetish I shouldn't rain on your parade.