Bank Failures: Our Experts Weigh In
|By Jurica Dujmovic|
As the financial world continues to reel from the recent bank failures, I have had the unique opportunity to gather some of the most prominent Weiss Ratings experts and discuss the potential implications and causes behind these events.
With the collapse of Silvergate, Silicon Valley Bank and Signature Bank, some are pointing fingers at their connections to the cryptocurrency industry. Meanwhile, others argue that government intervention and mismanagement are the real culprits.
In this round-table style, in-depth analysis, Weiss Ratings experts explore the factors at play, the potential motivations behind government actions, and the consequences that could unfold in the future.
Starting off the conversation is Nilus Mattive, a seasoned financial expert with a wealth of experience in traditional finance, which he combines with his more recent foray into the world of crypto. As a long-standing contributor to the industry, his insights offer a unique perspective on the unfolding events.
Nilus said, “I’m a traditional finance person first and foremost, and a crypto person only more recently. And in my opinion, it is not a coincidence that the three bank failures we have seen so far were all places where Circle had its cash reserves for USD Coin (USDC, Stablecoin) parked.”
For reference, the others are The Bank of New York Mellon (BK), Citizens Trust Bank, Customers Bancorp (CUBI), and New York Community Bancorp (NYCB) — a division of Flagstar Bank.
Considering the recent narratives around crypto, some people would likely agree with that statement. This is simply because they might believe exposure to crypto businesses like Circle are the direct cause of these problems.
Nilus sees it differently: “In many ways, I think the government caused the problems and is now conveniently using crypto as the scapegoat.”
This is a theory gaining traction in certain circles. In the case of both Silvergate and Signature, it appears as though the government intentionally caused the problems because the banks were crypto friendly.
If we look at the situation bank by bank …
Silvergate had a relatively high concentration of its business with crypto firms. And some of those firms were certainly feeling the pinch of crypto winter.
But where did the panic around Silvergate come from?
One of the biggest issues, according to Nilus, is that senators continually and publicly hammered Silvergate about its relationship to FTX, as well as other elements of its crypto-friendly business.
In fact, Silvergate ended up voluntarily unwinding its business as a result of “industry and regulatory developments.” It didn’t really fail. It quit the game.
Meanwhile, Silicon Valley Bank was highly focused on the technology industry, with crypto being just a subset of that. And it is easy to see why SVB got in trouble.
A lot of the bank’s young startup clients — even riskier enterprises in an already-cyclical sector — were experiencing downturns and needed to pull more and more cash.
Unfortunately, much of the bank’s money was parked in normally safe assets that experienced historic losses because of the Federal Reserve’s aggressive rate hikes. This made mincemeat of the bank’s “safe” balance sheet assets.
Then, the rumors and preemptive withdrawals — exacerbated by a tight-knit group of venture capital firms and tech titans on Twitter — cascaded the situation into a classic bank run.
While this can be chalked up to mismanagement on SVB’s part, Nilus believes that the Fed is also to blame.
One of our other experts, Chris Coney, is a seasoned expert in DeFi and cryptocurrencies, making him well-equipped to weigh in on the ongoing banking crisis and its impact on the crypto industry.
“I didn’t think it was fair when I saw cries of ‘mismanagement,’” Chris says. “Such accusations do not take into consideration how difficult it has been to navigate such a rapidly changing interest rate environment.”
In just a year, the Fed increased the base interest rate from 0.25% to 4.75%. That’s a whopping 1,700% increase! in just a year. This has led investors to flounder, as portfolio strategies differ greatly between those two interest rates.
If rates had increased at a slower pace, there would have been more time for portfolios to adjust. The last time the base rate increased rapidly was between 2016 and 2019, when it went from 0.25% to 2.5%. That is a 10x increase that happened in about three years.
There is that old saying: “Never let a good crisis go to waste.”
Politicians have been aching at every opportunity to tell horror stories about crypto, and this situation has proved no exception.
Nilus adds, “Signature is the smoking gun that proves this is as much about cutting off crypto funding as it is about preserving deposits. The bank had already been reducing its exposure to crypto businesses to alleviate any concerns that regulators or investors had. This is despite it already having a very diversified list of customers, many of whom operated relatively stable industries.”
In an update posted to ease growing rumors and a resulting market sell-off, SBNY said it had intentionally reduced its crypto-related deposits down to $1.51 billion and that deposits from other areas were rising.
Signature also reminded everyone that it didn’t trade or custody digital assets. Nor did it accept them as collateral.
While it had plenty of underwater Treasurys and other “safe” assets on its balance sheet, the vast majority of those were in the “hold to maturity” category. Other major banks, including names like Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC), do the same.
Meanwhile, there were no headlines suggesting a bank run was taking place at SBNY over the weekend, which could have forced SBNY to liquidate more assets than expected at big losses.
Most important, on the same day that New York regulators decided to seize SBNY, the U.S. government — including the Fed, Department of the Treasury and the Federal Deposit Insurance Corporation — announced its program to backstop any of these problematic assets anyway.
So, what exactly was the “systemic risk” cited by regulators?
Perhaps this is why even Barney Frank himself said, “I think that if [SBNY] had been allowed to open tomorrow, that [it] could’ve continued — we have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit … I think the bank could’ve been a going concern.”
At time of writing, plenty of other banks are getting taken out to the woodshed in the marketplace with nary a peep from regulators.
Nilus concludes, “Seems like a classic hit job to me, and it’s rather ironic to see the banking system now being used as a weapon against the crypto space and crypto-friendly businesses.”
Chris Coney also finds it ironic that none of the attempts to establish a “custody only” bank have been approved by regulators.
He says, “On the one hand, we have banks falling victim to the flaws of fractional reserve banking and facing liquidity crises. And on the other hand, you have regulators refusing to allow the likes of Custodia bank to operate.”
Talk about making the problem impossible to solve.
Another one of our analysts, Alex Benfield, has been closely following the cryptocurrency industry and its impact on the broader financial landscape. His sharp observations shed light on the coordinated efforts to undermine crypto adoption in the U.S. and the potential implications for the future of digital finance.
Alex agrees with Nilus on the point that these moves seem to be part of a greater coordinated effort to kneecap the crypto industry, conveniently during a very chaotic and confusing bank crisis.
If Silvergate was the only victim, we could have seen this as a coincidence that one of crypto’s biggest banking partners happened to fall. And while SVB is not exactly a crypto-friendly bank — unless you consider non-zero exposure to crypto as friendly — it was not entirely crypto-averse.
So, the loss of both institutions is what is leading us to believe this was a potential coordinated attack.
However, when the FDIC seized Signature bank on Sunday night — to the surprise of management including Barney Frank, minutes before they announced a plan to cover all bank deposits to prevent more bank collapses — all doubt was expunged.
This was no accident.
For over a month now, Nic Carter, one of Alex’s favorite analysts in this space, has been talking and warning about Operation Chokepoint 2.0. This is a highly coordinated effort from multiple U.S. agencies to combat the cryptocurrency industry.
Alex says, “While it seemed plausible at first, now this coordination seems obvious. The current administration has made it all too apparent that they do not like the crypto industry for whatever reason and they are going to do whatever they can to squash crypto adoption in the U.S. The battle lines have been drawn, and as an industry, it's time we start fighting back.”
Personally, I expect to see a major increase in crypto lobbying and political campaigning before this next election. Many Bitcoiners have now become single-issue voters, and I am also in favor of doing whatever it takes to ensure the U.S. is not left out of the digital future.
Next, Gavin Magor is an astute observer of the banking industry, with a keen eye for dissecting the factors that contribute to the successes and failures of financial institutions. His commentary on the recent bank collapses provides valuable context for understanding the broader market dynamics at play.
In general, Gavin is concerned about the context around the bank failures.
SVB was deep into a completely mismatched bond portfolio when they knew what the Fed was doing with interest rates. That does not reflect well on them.
Furthermore, they were aware that customers were taking cash out as their businesses needed, but continued in their bond-centric investment strategy.
Gavin asks, “Where was the Chief Risk Officer? Clearly, asleep at the wheel.”
While there were other factors, they don’t make SVB look much better. The CEO was naive in his announcements of losses followed by the call for more funding. Peter Thiel and others then leapt on his failure to raise capital and put the boot in.
Signature might have a point, but Barney Frank is on the record as a crypto hater. He received enormous credibility for his part in the Dodd-Frank Act and was one of a limited number of knowledgeable politicians.
Gavin adds, “Money speaks and now he went to the dark side and started arguing for fewer controls. ”
Finally, Juan Villaverde is an expert in the realm of finance and economics, as well as crypto, with a particular focus on understanding the underlying causes and consequences of systemic financial issues. His insights on the sovereign debt crisis and the role of government policy in shaping the current landscape offer a sobering perspective on the challenges that lie ahead.
Juan believes that this boils down to the law of unintended consequences. While trying to purge the crypto industry, U.S. lawmakers went after the perceived single point of failure: crypto-friendly banks.
Unfortunately, they didn’t look ahead and see the potential consequences from forcing a bank run.
If you force a bank to shut down through allegations and semi-coercive action, you will scare the daylights out of depositors, especially if you don’t hear a peep from regulators.
Fear in an already-vulnerable system has led to a run on SVB … and will likely lead to even more.
This is the systemic nature of the problem, and exactly why Juan feels it’s misguided to single out SVB, Silvergate or Signature and speak as if these are somehow isolated examples.
The banking system has massive losses on their bond portfolios. As we learned in 2008, hedging doesn’t work. It merely spreads the risk around.
If all banks have interest rate hedges, then someone is taking on water for having sold those hedges. This is the nature of systemic problems and why pointing fingers and laughing at one bank’s failures is misguided and dangerous.
It is always the weakest that fall first. But it never stops there, not when the issue is shared by the entire industry both inside and outside the U.S.
In fact, we saw the exact same issue in the U.K. recently regarding pensions.
The bottom line is we’re in a sovereign debt crisis.
There’s way too much debt issued by governments. This debt has been — and still is — considered risk-free. This is the real problem.
For decades, and especially after 2008, financial institutions were encouraged and even ordered to gobble up these bonds.
Now, somehow, the Fed’s actions can be pinned on a small bank? Yes, there was poor risk management on the bank’s part. But it is not entirely to blame.
But it’s foolish to think this issue is contained without immediate government support.
Juan believes that this is ultimately what will force a Fed pivot in 2023: “They’re on the case and that’s good, but it is my humble opinion that they haven’t done enough yet.”
The Fed must do more to mop up a problem that was largely caused by being way too easy in 2020 and 2021, and way too tight in 2022. This is no way to run monetary policy.
Last year, the Bank of Japan was the confusing financial system. Now, it looks like the head of the class.
We need to recognize we’re in a sovereign debt bubble and keep unlimited assistance running for sovereign debt markets.
It’s either that or a debt deflation death spiral that will make 1929 look like a walk in the park.
Here at Weiss Ratings, experts present a sobering outlook on the current financial landscape. As the debate over the role of cryptocurrency in these events rages on, the industry must brace itself for an uncertain future.
Our experts argue that coordinated efforts to stifle the growth of the cryptocurrency sector may have far-reaching consequences, not only for the banking industry, but also for the global economy.
With a sovereign debt crisis looming, it remains to be seen how policymakers will navigate these turbulent waters and how the crypto industry will weather the storm.