🤔 Wiser! Recap #116: What’s happening at the banks called “Si…” And what else is happening in tech.

What’s happening and what’s coming next in tech, innovation and strategy.

What’s the point of a bank?

First, it was Silvergate Bank, then Silicon Valley Bank, and finally Signature Bank. All starting with “Si”, all niche in their space, and all mid-sized banks that focused on servicing the technology and crypto sectors, areas of interest for the Wiser! audience.

Now all gone in the past week. Of the three banks, it has been Silicon Valley Bank that has drawn most attention and catapulted the story to the top of the mainstream news agenda, fighting for airtime between Gary Lineker and Rupert Murdoch. Many others have written more detailed explanations than I can about what went wrong; three of the better ones are by Marc Rubinstein, Matt Levine, and Noah Smith.

But what I can make sense of for you is, despite all of the complexities and technicalities, the fundamentals of what went wrong are quite straight forward;

  • The majority of startups put their cash into Silicon Valley Bank.
  • SVB made money with this money by investing it in long term US government bonds and mortgage-backed securities.
  • As interest rates started to rise, depositors took out more money than they were putting in.
  • To meet demand for cash, SVB started to sell off its investments to raise cash (liquidity).
  • BUT, they had to sell them at a loss because interest rates were rising quickly and these long term investments were no longer worth what they were. SVB incurred a loss of $1.8 billion.
  • SVB announced they would raise $2 billion from shareholders to fill the gap. This spooked the VCs who had the biggest stakes on the startup’s cash. They withdrew heavily, exacerbating the problem and starting a run on the bank.
  • Within 24 hours, it was all over and SVB was taken under the control of the US Gov.

To be honest, last Friday I wasn’t so interested in the collapse of Silicon Valley Bank (SVB), the 16th largest bank in the USA and only the 2nd American bank to go bust since Lehmans in 2007. By all accounts, the bank had been technically insolvent for months.

Maybe I should have been given that SVB is/was the bank of choice for tech startups to deposit their cash and provide unique financial service products for startups and entrepreneurs.

And lets not forget Signature and Silvergate also went under. They’re two of the major crypto-focused banks that offered so-called on/off ramp banks for their ability to enable the exchange of ordinary money (fiat) for digital money (cryptocurrency), and vice versa. They are/were an important part of the financial ecosystem for crypto. The irony, of course, with Signature and Silvergate is that crypto is meant to be the financial system of the unbanked. But even the unbanked need a bank!

Interestingly, given the demise of Signature and Silvergate, the crypto markets didn’t seem bothered either. Both Bitcoin and Ethereum have jumped c20% since Friday. The market cap of the entire crypto market is back over $1 trillion, up around 5% in the last 24 hours alone. And the stablecoin USD Coin regained its $1 peg on Monday after it fell to lower than 88 cents over the weekend. (USDC is the fifth-largest cryptocurrency by market cap, with roughly $39 billion of the stablecoin in circulation. Circle, the issuer of USDC has around $3.3 billion (approx 10%) of its holdings at SVB.)

The point is that the DeFi market (decentralised finance) is predominantly built on the stablecoin USDC. Had USDC not regained its 1:1 dollar peg, it would have been a devastating blow for the entire crypto sector.

Here’s The Thing: On Friday I decided to take the matter a little more seriously after I got a call from one of my investments, a UK insurance tech startup. It turns out that they had an account with SVB — of course they did! Apart from the management distraction they could do without, and the admin overhead of moving money around, contacting suppliers, getting payments stopped , etc, they were not too concerned. But it did bring the matter closer to home.

Of course, the real losers here will be the shareholders as bigger banks swoop in like vultures around a wildebeest’s carcass. In the final analysis, this will just be one further step for the inevitable consolidation of the banking industry. (As banking becomes increasingly commoditised and automated, it becomes just a utility, and how many utility providers do we really need?)

Predictably, over the weekend, the regulators, big banks and governments moved quickly to shore up the dam and prevent further fallout and contagion — US regulators announced that all Silicon Valley Bank and Signature Bank depositors will be made whole and get access to funds starting immediately. The Bank of England said in a statement yesterday that HSBC will acquire the British unit of Silicon Valley Bank for £1. “This action has been taken to stabilise SVBUK, ensuring the continuity of banking services, minimising disruption to the UK technology sector and supporting confidence in the financial system,” the central bank said in a statement.

From everything I’ve seen and read, there appears to be no criminality, fraud or ill intent at any of these banks, just a case of mismanagement and/or bad timing. I heard that shareholders at SVB are suing the management for incompetence. Good luck with that one.

The reality is that these are stories of unfortunate timing more than anything. Of course, questions will be asked, such as why SVB ran with no Chief Risk Officer or why they were over exposed to long term, low interest bonds at a time when interest rate were predicted to rise. But, IMHO, these stories just demonstrate that the system works as it’s meant to work, and that system sucks because that’s how it’s meant to be. After all, how can a bank be leveraged 185 to 1 ? I’m no banker, which is why it makes no sense to me.

And that’s all I have to say on the matter…and leave the final word to The Simpsons.

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Rick Huckstep - Making Sense Of Tech

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