US banking sector in turmoil as three banks close in one week

The US financial industry has suffered a major scare, with not one, not two, but three banks shutting their doors in the span of just one week. iGaming NEXT has summarised the key developments and the blame game that followed.

What happened?

The most significant of the three closures was Silicon Valley Bank (SVB), which collapsed Friday morning following a shocking 48 hours of a bank run and capital crisis.

On Wednesday, the company’s surprise announcement that it needed to raise $2.25bn to address balance sheet issues triggered a downward spiral.

By Thursday, customers had withdrawn a staggering $42bn in deposits, according to a California regulatory filing, further exacerbating the situation.

The closure of the tech lender was then ordered by California regulators, who placed it under the control of the US Federal Deposit Insurance Corporation.

With this, SVB became the second-largest financial institution failure in US history, second only to Washington Mutual, which collapsed during the 2008 financial crisis.

Meanwhile, New York state financial regulators shut down crypto-focused Signature Bank on Sunday (12 March) due to concerns about its potential impact on the US economy as a “systemic risk”.

Adding to the upheaval, Silvergate Bank, which had also specialised in cryptocurrencies, announced on Wednesday (8 March) that it would voluntarily wind down its operations, after crypto market plunge sparked a depositor exodus.

What caused the collapse?

There are different opinions on what caused the ultimate collapse of the banks, and there is quite a bit of finger pointing going on.

One of the significant reasons behind SVB’s downfall was the bank’s decision to invest billions of dollars in long-term bonds, expecting that interest rates would remain stable.

However, the US Federal Reserve Bank’s decision to increase interest rates resulted in the devaluation of these bonds, forcing SVB to sell them at a loss to bolster its capital position.

A Forbes article highlighted that the scale of bank failures in terms of total assets for 2023 was now similar in size to 2008 at the peak of the financial crisis.

However, in 2008, a higher number of individual banks failed compared to the current situation.

Tim Heath, founder of Yolo Group and Yolo Investments, told iGaming NEXT that the current scenario resembled 2008 and that “crypto is just another asset class that will be collateral damage”.

“There have been systematic risks in the banking industry for decades,” he said.

He cited fractional reserve banking as an example, stating that this system only works if customers do not withdraw their deposits.

Heath added: “These three banks were not shuttered because they were crypto banks. They were shuttered because their duration mismatch in assets versus liabilities meant they could not survive the impending run in the short term.”

He acknowledged that the failsafe system worked as designed, but it should not have reached this point.

Social media response

The SVB collapse has sparked a debate among members of the VC community, with some investors attributing the bank run to social media panic.

Brad Svrluga, co-founder and general partner at Primary Venture Partners, commented on LinkedIn that while “SVB made significant mistakes”, the “hysterical urging” by some VCs to withdraw deposits on social media ultimately triggered a run on deposits that led to the collapse.

Meanwhile, amid reports about start-ups that had funds frozen in the bank and struggling to to pay their staff, some members of the VC community offered support to affected companies.

Lloyd Danzig, managing partner at Sharp Alpha Advisors, wrote: “If you are a post-revenue sports, gaming, or entertainment startup impacted by the Silicon Valley Bank failure, we remain resolutely bullish on our thesis and are looking to be supportive. Please reach out directly if you are experiencing financing challenges.”

Emanuel Pearlman, chairman, board member, and advisor at MidCap Financial Investment Corp, also encouraged early-stage sports betting and iGaming companies in need of immediate capital to get in touch.

Mitigating the impact

The collapse of Silicon Valley Bank, along with the two other banks, has sent shockwaves through the financial world, raising concerns about the stability of the banking sector and the potential impact on tech start-ups and other businesses.

In an effort to avoid a financial crisis, the US government announced on Sunday night that all SVB depositors would have access to their money on Monday morning.

This unprecedented intervention was intended to provide relief to those affected by the bank’s collapse.

According to Danzig, the real-money gaming industry found itself especially vulnerable to the SVB failure because of difficulties that companies in the space often have finding suitable banking partners.

“Although founders are breathing a sigh of relief this morning, those utilising regional banks are still attempting to set up new accounts elsewhere in order to be more robustly insured against any fallout or future issues,” Danzig told iGaming NEXT.

He added that the broader start-up ecosystem is still trying to adjust this week, “with many waiting to see how the fallout will impact operations and fundraising activities going forward”.

Meanwhile, HSBC has announced today (13 March) that it has acquired the UK arm of SVB for a nominal fee of one pound, a move aimed at mitigating the impact of the biggest bank collapse since the financial crisis on UK tech start-ups.

This was received as welcome news by a battered cryptocurrency sector.

On Monday morning, Bitcoin reached $22,560.20, up by almost 10% and its highest level in 10 days, while Ether also surged about 10% to $1,614.89, based on CoinDesk data.