March 2023 started with bank collapses that came seemingly out of nowhere and affected businesses and individuals not only in the United States but worldwide. In an already strained economy, many fear that it will lead to a financial crisis akin to that experienced in 2008.
Let’s learn more about the 2023 US bank collapses, their causes, whether this can turn into another 2008, and what actions businesses can take to mitigate risks.
What Banks Collapsed in 2023?
In March 2023, three US banks collapsed:
- Silvergate Bank collapsed on March 8th, 2023. It was a California-based bank. Founded in 1988, it started to offer banking services to those involved in the cryptocurrency market and obtained approval to work with cryptocurrency firms in 2014. This led to the bank’s significant growth, and before the end of 2022, about 90% of its deposits were in the cryptocurrency industry. Approximately $1 billion belonged to FTX, whose founder Sam Bankman-Fried faced multiple criminal charges in late 2022.
- Silicon Valley Bank, or SVB for short, collapsed on March 10th, 2023. It was a commercial bank headquartered in California. Founded in 1983, it was among the 20 largest banks in the United States before its collapse. SVB had a strong focus on the technology industry and financed almost haft of venture-capital-backed American technology and healthcare companies. Among its clients were world-famous companies, such as Airbnb, Square, Cisco, Pinterest, and Fitbit, and numerous tech entrepreneurs. At the end of 2022, SVB had $209 billion in assets.
- Signature Bank collapsed on March 12th, 2023. Founded in 2001, it was based in New York City. Initially, it primarily serviced local small businesses and homeowners. However, in 2018, it began providing services in the cryptocurrency industry. This tripled the bank’s revenue in 2018, and at the start of 2023, it became the second largest banking service provider in the cryptocurrency market, only preceded by Silvergate Bank at the time.
Together, these banks have led to the third-largest bank failure in the history of the United States.
Why Did the US Tech Banks Collapse in 2023?
A combination of reasons caused the 2023 bank collapses. They can be organized into three main categories:
1. Market Conditions
In mid-2021, the entire world started experiencing an increase in inflation due to the effects of the pandemic, and they became increasingly more prominent in 2022, after Russia’s invasion of Ukraine. This affected the global prices of oil, gas, fertilizer, various raw materials, and subsequently food.
To slow inflation, Federal Reserve increases interest rates. However, despite the overall surge in prices, Federal Reserve insisted that inflation was only “transitory” and kept interest rates low. This wasn’t the case, and many experts have since labeled it as a bad move. To make up for it, the Fed hiked up interest rates at a pace that’s been the fastest in recent history.
In the meantime, banks make money using both long- and short-term bonds. Short-term bonds mature within only a few years, whereas long-term bonds mature in 10 years or more. Bonds that need longer to mature have higher interest risk. This also means that they are more sensitive to interest rate changes.
Due to the interest rate hikes by Federal Reserve, the returns on long-term bonds that Silicon Valley Bank had dropped, significantly lowering their value. That, in turn, caused many of its investors to pull out, lowering the prices of its stock to plummet.
SVB collapse prompted Signature Bank depositors to withdraw billions, which, in turn, caused its stock to sink on its last day of public trading.
In the case of Silvergate, its collapse was heavily impacted by the fall of FTX. Following that as well as various other scandals and issues in the crypto industry, the stock value of Silvergate fell 97% from November 2021. Combined with its high reliance on short-term bonds and overall market conditions, this eventually resulted in the bank’s collapse.
2. Poor Risk Management
All three banks that collapsed in 2023 displayed signs of poor risk management, which prevented them from being able to prepare contingency plans for possible issues.
Silicon Valley Bank had the most prominent issues. It did not have a Chief Risk Officer for 8 months while inflation was rising and the venture capital market was spiraling. After the company’s previous CRO stepped down in April 2022, the new one was only appointed in January 2023, just two months before the bank’s collapse. In the meantime, the bank did actively invest in other initiatives. Moreover, more than 90% of the bank’s deposits were not insured.
In addition, SVB’s parent company, as well as its CEO and CFO, have been sued for fraud by shareholders. Both top executives had sold a large number of their shares a few weeks before the collapse and paid their employees annual bonuses hours before the bank collapsed instead of the second Friday of March as previously done. Thus, shareholders believe that they had known about the bank’s weaknesses and concealed the fact from the company’s shareholders.
In addition, both Silicon Valley Bank and Silvergate concentrated their assets in a single area, making them more susceptible to potential issues. For example, Silvergate ended up investing in risky assets rather than choosing a more diverse array of secure and stable alternatives. While diversifying their portfolio is important for any bank, it is crucial for a company working with cryptocurrencies and digital assets. This ultimately showed that Silvergate was not equipped to navigate a volatile market.
3. Lack of Regulations
Many have wondered why regulators didn’t step in.
They were not expected to.
Following the 2008 financial crisis, new regulations were passed. They would trigger more stringent practices, such as regulations, capital requirements, and stress tests, once a specific sum in assets was reached.
However, Silicon Valley Bank’s CEO lobbied the Senate for the threshold for banks of his size to be raised from $50 billion to $250 billion. He reasoned that to meet these requirements, SVB would need to divert valuable resources from being able to finance US startups.
This was taken into account, and new regulations were passed in 2015. Therefore, at the time of the collapse occurred, neither of the banks had reached the asset threshold necessary for strict regulations to take effect.
Is This Another 2008?
US bank collapses in 2023 is the largest instance of bank failure since the financial crisis of 2008. Therefore, many businesses and individuals fear the stability of the American banking system and that this may lead to a financial crisis of a similar scale.
While it’s too early to state what the long-term ramifications of the 2023 US bank collapses will be, the current circumstances differ from those that started the 2008 financial crisis.
In 2008, various large banks, such as Lehman Brothers, Washington Mutual Bank, and Bear Sterns, fell simultaneously, followed by approximately 300 more banks over the next two years. In the process, their assets become worthless. In 2023, the affected banks are significantly smaller. Moreover, their assets have not become worthless but simply drastically declined in value.
Thus far, large banks have not been affected. It’s essential to note that the 2023 bank collapses occurred largely due to poor asset and risk management. SVB, Signature Bank, and Silvergate had all focused on assets in a single area. Meanwhile, larger banks typically work with larger portfolios, more diverse funding sources, diversification, and liquidity shocks.
That being said, smaller regional banks may experience issues, whereas larger banks may benefit from this situation if individuals and businesses choose to switch to them to mitigate risks.
The Consequences of US Bank Collapses
Silicon Valley Bank collapse has made an impact on tech startups nationwide, as well as abroad as far as in China. It’s estimated that approximately 50% of US venture-capital-backed startups, or 65,000 to be more precise, had been Silicon Valley Bank clients.
Effects have already rippled through the tech industry. Etsy has delayed payouts to some of its sellers. Roku, Roblox, Vimeo, and others had a portion of their funds retained by Silicon Valley Bank. Many companies state that they do not believe that the collapse of Silicon Valley Bank will significantly impact their operations. However, it is not known how much of their money they’ll recover in the process.
While larger corporations have a consistent cash flow and can navigate 2023 US bank collapses more efficiently, startups are struggling to pay their employees. Since many startups don’t have a consistent income, they often rely on funding to keep operations going.
Thus, with no stable cash flow and the source of funding gone, they’re out of options. In addition, venture capital investors canceled their meetings with startups due to uncertainty of the industry and their future. As a result, many startups fear that they will need to start laying off employees.
Besides that, experts predict that hiring freezes, office mandates, and reduced pay are some of the consequences to expect. Meanwhile, analysts estimate that SVB collapse may set innovation in the healthcare industry back by at least 10 years, and others fear that it may cause a generation of startups to perish, negatively affecting innovation and competition in the United States.
How Can Businesses Reduce Impact from 2023 Bank Collapses?
To navigate the 2023 bank collapses and their consequences, businesses can take a number of steps:
- Hold funds in various bank accounts in different large financial institutions: Diversification can look more appealing to investors and protect funds from becoming affected. This strategy has protected some of the larger SVB clients from losing all their assets. In addition, big banks tend to be less affected by financial issues because they have a larger diversity of funds and assets.
- Implement liquidity management: Liquidity management is the process of making sure that a business has the money available to meet its upcoming financial obligations. For instance, plan ahead how much money you will need to complete a specific project or pay for specific employees and have it ready before you begin.
- Staff augmentation: Businesses that struggle with paying their staff on a consistent basis, can benefit from staff augmentation. It’s an outsourcing model in which a third party supplies qualified tech talent that joins the company for short-term projects. This enables the flexibility of scaling teams up and down according to necessity and is more cost-effective than having a permanent in-house team.
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