Have you ever felt like you’re walking down a path you’ve been down before? That’s how it feels when we take a look at the current state of the banking industry. Just in March 2023, we saw three major US banks – Silvergate Capital Corporation, Silicon Valley Bank, and Signature Bank – fail due to a series of unfortunate events. The recent failures serve as a reminder of the fragility of the financial sector and the need for companies to remain vigilant and adaptable in the face of economic uncertainty.
To shed some insights on the current financial landscape, DIFX conducted its first ever Market Intelligence webinar on the topic, Why Do Banks Fail, Is It Time To Diversify From Them?
The webinar was moderated by Rose Perinchery, Head of PR at DIFX Technology and joined by Ashita Shenoy, CFO & Dennis Jedburgh ,Lead Research Associate of DIFX Technology, where they explored the implications of these events for businesses and investors alike and discussed how companies can better prepare themselves for potential disruptions in the banking industry.
Here’s a quick roundup on the key insights shared with the DIFX community and trading professionals.
RP: Hello everyone
Welcome to the first ever DIFX Market Intelligence webinar on why do banks fail and is it time to diversify out of them? This is Rose Perinchery, Head of PR at DIFX and and today joining me for our webinar is Ashita Shenoy, CFO at DIFX and Dennis Jedburgh, our lead Research Associate at DIFX.
Thank you all for joining us on a Wednesday evening to learn more about why do banks fail and and is it time to diversify out of them! I think we can first start with with a quick little introduction from both of our guests,
AS: Hello everyone my name is Ashita Shenoy, I am the CFO at DIFX, prior to joining the company, I spent twelve years at KPMG in the Cayman Islands building up the corporate finance practice there
and two years with a regional private equity fund.
DJ: Hi everyone I am Dennis Jedburgh, the lead research associate at DIFX, with over seven years trading and financial expertise, as well as a co-founder of 2 start ups within the fintech field.
RP: All right perfect, thank you guys for joining us today and before we get into this just a quick little disclaimer that nothing Ashita, Dennis or myself will say should be construed as financial advice or trading advice. What we are saying is purely for an educational commentary purposes, so please keep that in mind and remember always to do your own research.
RP: So before we get to the hot topic of why do banks fail I think Dennis if you could tell us sort of the backstory on what exactly happened mid 2022 and give us a little recap on the market environment during that time period it would be great.
DJ: So in march 2022 we saw inflation start to rise quite aggressively, here the fed had to react to combat rising inflation and how they did this was quite simple, they started hiking interest rates.
Now this was seen as an aggressive hike cycle, probably the most aggressive in our generation. We saw four consecutive 75 bases point hikes which in turn saw the CPI data start to fall and the economy start to tighten.
Flash forward to December and January we saw CPI data fall from 7.1% down to 6.5%, with Powell sentiments looking positive and being less corkish with monetary policy. However, a few days later jobs later came out which was really hot so he had to turn hawkish again and then he started crossing in a 50 bases point red hike up until the recent banking crisis.
So all in all, 2022 could be summed up in to 2 points:
- High Interest Rates
- High Inflation
RP: So moving on to the banking crisis, what exactly happened with Silicon Valley Bank? I think for a majority of the public this was a relatively unknown regional bank in the US, that all of a sudden collapsed on a March weekend!
Ashita, could explain the timeline around the collapse and the reason why SVB seemingly failed so fast?
AS: Silicon Valley Bank was the sixteenth largest bank in the United States and had over $200 billion of assets on its balance sheet, with most of its clients being start ups concentrated in the Bay Area.
A significant portion of the bank’s deposits were well over the $250,000 FDIC insured limit. Between March 8th and 9th, the bank announced that it had sold a significant portion of its $26 billion available for sale investment portfolio, which led to a nearly $2 billion loss for the bank.
The bank also announced its plan to raise over $2 billion of capital, $500 million of which had already been committed by General Atlantic. This announcement came after Silvergate’s announcement that it would wind up its operations voluntarily. This led to VCs and their portfolio companies withdrawing their deposits from Silicon Valley Bank, which snowballed into the FDIC announcing the bank’s shutdown on March 10th. The announcement raised questions about whether depositors would lose their money.
Recent liquidity issues faced by several regional banks in the United States have raised concerns about the stability of the banking system. While these banks are not systemically important, they are crucial to small businesses and consumers, accounting for nearly 31% of all bank deposits in the US, or about $6 trillion of deposits.
Moreover, 51% of all commercial and industrial lending in the US happens through these smaller banks, making them important players in the economy. The liquidity issues faced by these banks have resulted in a flight of deposits from smaller banks into larger banks such as Fortress and JPMorgan, which has put a liquidity strain on some of these smaller banks. As a result, there is growing concern about the possibility of more bank failures in the future.
To watch the full webinar and the different asset classes explored, head on over to the our official Youtube page: