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.
- 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.