Banking crisis beginning in March 2023
The 2023 United States banking crisis was a series of bank failures and bankruptcies that took place in early 2023, with the United States federal government ultimately intervening in several ways. Over the course of five days in March 2023, three small-to-mid size U.S. banks failed, triggering a sharp decline in global bank stock prices and swift response by regulators to prevent potential global contagion. Silicon Valley Bank (SVB) failed when a bank run was triggered after it sold its Treasury bond portfolio at a large loss, causing depositor concerns about the bank's liquidity. The bonds had lost significant value as market interest rates rose after the bank had shifted its portfolio to longer-maturity bonds. The bank's clientele was primarily technology companies and wealthy individuals holding large deposits, but balances exceeding $250,000 were not insured by the Federal Deposit Insurance Corporation (FDIC). Silvergate Bank and Signature Bank, both with significant exposure to cryptocurrency, failed in the midst of turbulence in that market.
In response to the bank failures, the three major U.S. federal bank regulators announced in a joint communiqué that extraordinary measures would be taken to ensure that all deposits at Silicon Valley Bank and Signature Bank would be honored. The Federal Reserve established a Bank Term Funding Program (BTFP) to offer loans of up to one year to eligible depository institutions pledging qualifying assets as collateral.
To prevent the situation from affecting more banks, global industry regulators, including the Federal Reserve, the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank intervened to provide extraordinary liquidity.
By March 16, large interbank flows of funds were occurring to shore up bank balance sheets and some analysts were talking of a possibly broader U.S. banking crisis. The Federal Reserve discount window liquidity facility had experienced approximately $150 billion in borrowing from various banks by March 16.
Soon after the bank run at SVB, depositors quickly began withdrawing cash from San Francisco-based First Republic Bank (FRB), which focused on private banking to wealthy clientele. Like SVB, FRB had substantial uninsured deposits exceeding $250,000; such deposits constituted 68% of the bank's total at year-end 2022, declining to 27% by the end of March, as $100 billion in uninsured deposits were withdrawn. Despite a $30 billion capital infusion from a group of major banks in March, FRB continued to destabilize and its stock price plummeted as the FDIC prepared to take it into receivership and find a buyer on April 29. On May 1, the FDIC announced that First Republic had been closed and sold to JPMorgan Chase.
Background.
In the lead-up period, many banks within the United States had invested their reserves in U.S. Treasury securities, which had been paying low interest rates for several years. As the Federal Reserve began raising interest rates in 2022 in response to the 2021–2022 inflation surge, bond prices declined, decreasing the market value of bank capital reserves, causing some banks to incur unrealized losses; to maintain liquidity, Silicon Valley Bank sold its bonds to realize steep losses. Also, several banks gained market exposure to cryptocurrency and cryptocurrency-related firms prior to and during the COVID-19 pandemic; the 2020–2022 cryptocurrency bubble popped in late 2022. In this environment, three such banks failed or were shut down by regulators: The first bank to fail, cryptocurrency-focused Silvergate Bank, announced it would wind down on March 8, 2023, due to losses suffered in its loan portfolio. Two days later, upon announcement of an attempt to raise capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be seized by regulators that day. Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12, with regulators citing systemic risks. The collapses of First Republic Bank, Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest bank failures in the history of the United States, respectively, smaller only than the collapse of Washington Mutual during the 2007–2008 financial crisis.
In 2019, the Federal Reserve's "Tailoring rules" changed, increasing minimum asset threshold from $50 billion to $100 billion and reduced the number of required stress testing scenarios, allowing banks with under $100 billion to have reduced liquidity standards. Signature Bank and First Republic Bank were under the $100 billion total assets for the Federal Reserve's tailoring rules, allowing the banks to have reduced regulation for liquidity. Some have questioned if First Republic Bank would have had a bank run if there were similar regulation to EU countries in the United States.
Liquidation of Silvergate Bank.
Background.
Silvergate Bank was a California-based bank that began operations in 1988 as a savings and loan association. In the 2010s, the bank began to provide banking services to players within the cryptocurrency market. The bank sought regulatory approval in the summer of 2014 to do business with cryptocurrency firms. The bank expanded the assets on its balance sheet significantly—doubling its assets in its 2017 fiscal year to $1.9 billion—by servicing cryptocurrency exchanges and other companies who were involved in the cryptocurrency business that could not secure financing from larger, more conservative banks. Despite its rapid growth, the company maintained a small physical footprint; in 2018[ [update]], the bank had only three branches, all located in Southern California. By the fourth quarter of 2022, 90% of the bank's deposits had become cryptocurrency-related, with over $1 billion in deposits being tied to Sam Bankman-Fried.
In addition to providing traditional banking services to its cryptocurrency clients, the bank operated as a clearinghouse for its banking clients; it involved itself in the business of resolving and settling transactions in real-time through its proprietary Silvergate Exchange Network. The network allowed a client to send payments in U.S. dollars from its accounts with Silvergate to those of another client of the bank without requiring an interbank wire transfer. A large number of cryptocurrency companies set up accounts with the bank to take advantage of Silvergate's relatively quick transaction settling times.
Despite conducting the majority of its business with cryptocurrency companies, Silvergate's investment portfolio was fairly conservative; the company took large positions in mortgage-backed securities as well as U.S. bonds. These sorts of assets, while reliable to be paid-in-full through their maturity date, carry risks associated with changes in interest rates; there is an inverse relationship between the mark-to-market value of a bond and the bond's yield. As interest rates shot up during the 2021–2023 inflation surge, the mark-to-market price of these securities decreased significantly. When these losses are unrealized, this does not typically cause the bank to cease operating, as the bank will receive payment-in-full under the original terms of the bond. However, if forced to sell these securities at a lower mark-to-market price, the losses on these types of assets become realized, posing significant risks to the bank's ability to continue to operate.
Events.
Silvergate was hit with a bank run in the wake of the bankruptcy of FTX; deposits from cryptocurrency-related firms dropped by 68% at the bank, with the bank facing requests from its clients to withdraw upwards of $8 billion in deposits. As Silvergate did not have enough cash-on-hand to satisfy the deposit withdrawals, the bank began to sell its assets at a steep loss; the company realized a loss of $718 million on withdrawal-related asset sales in the fourth fiscal quarter of 2022 alone. The bank, in a public statement, said that it was solvent at the end of Q4 2022, with an asset sheet containing assets of $4.6 billion in cash and $5.6 billion in liquid debt securities, with $3.8 billion in deposit obligations. Silvergate faced tight financial constraints in the coming months, selling assets at a loss and borrowing $3.6 billion from the Federal Home Loan Bank of San Francisco to maintain its liquidity. Silvergate wrote in a regulatory filing on March 1 that the bank risked losing its status as a well-capitalized bank and that the bank faced risks relating to its ability to continue operating.
Facing continued losses from sales of securities at mark-to-market price, Silvergate released a public notice on March 8, 2023, saying that it would undergo voluntary liquidation and would return all deposited funds to their respective owners.
Collapse of Silicon Valley Bank.
Background.
Silicon Valley Bank (SVB) was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States and was heavily skewed toward serving companies and individuals from the technology industry. Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB. Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have been clients of the bank. In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs. According to the FDIC, it had $209 billion in assets at the end of 2022.
Silicon Valley Bank recorded an increase of its deposit holdings during the COVID-19 pandemic, when the tech sector experienced a period of growth. In 2021, it purchased long-term Treasury bonds to capitalize on the increased deposits. However, the current market value of these bonds decreased as the Federal Reserve raised interest rates to curb the 2021–2023 inflation surge. Higher interest rates also raised borrowing costs throughout the economy and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs.
Events.
To raise cash to pay withdrawals by its depositors, SVB announced on March 8 that it had sold over US$21 billion worth of securities, borrowed US$15billion, and would hold an emergency sale of some of its treasury stock to raise US$2.25billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers withdrew funds totaling US$42billion by the following day.
On March 10, 2023, as a result of the bank run, the California Department of Financial Protection and Innovation (DFPI) seized SVB and placed it under the receivership of the FDIC. The FDIC established a deposit insurance national bank, the Deposit Insurance National Bank of Santa Clara, to service insured deposits and announced that it would start paying dividends for uninsured deposits the following week; the dividends were funded by proceeds from the sale of SVB assets. Some 89 percent of the bank's US$172billion in deposit liabilities exceeded the maximum insured by the FDIC. Two days after the failure, the FDIC received exceptional authority from the Treasury and announced jointly with other agencies that all depositors would have full access to their funds the next morning. An initial auction of Silicon Valley Bank assets on the same day attracted a single bid, after PNC Financial Services and RBC Bank backed away from making offers. The FDIC rejected this offer and plans to hold a second auction to attract bids from major banks, now that the bank's systemic risk designation allowed the FDIC to insure all deposits. The bank was later reopened as a newly organized bridge bank, Silicon Valley Bridge Bank, N.A.
On March 26, 2023, the FDIC announced that First Citizens BancShares would acquire the commercial banking business of SVB. As part of the deal, First Citizens brought around $56.5billion in deposits and $72billion of SVB's loans discounted by $16.5billion, while around $90billion of SVB's securities continue to remain in receivership. The FDIC received about $500million-worth of equity appreciation rights linked to First Citizens' shares. SVB's 17branches reopened under the First Citizens brand the next day, with all SVB depositors becoming depositors of First Citizens. SVB Private was initially going to be auctioned separately but First Citizens later acquired the business as well. The UK arm of SVB was acquired by HSBC, which announced it would rename the business to HSBC Innovation Banking.
Collapse of Signature Bank.
Background.
Signature Bank was a New York City-based bank founded in 2001. The bank began as a subsidiary of Bank Hapoalim that took on clients with assets of around $250,000, lending to small businesses based in New York City and in the surrounding metropolitan area. The bank provided financing within the multifamily residential rental housing market in the New York metropolitan area beginning in 2007, though it began to reduce its exposure to the market during the 2010s. By 2019, just over four-tenths of the value of the bank's loans were made to multifamily homeowners in the New York metropolitan area, comprising $15.8 billion