Silicon Valley Bank (SVB) boasted over $200 billion in assets and was a lifeline for crypto companies.
Notably, it was one of the few institutions offering services to crypto companies in the United States as other banks shied away from the sector, fearing risk and the possibility of a sudden regulatory crackdown.
The downfall of SVB, Signature Bank and Silvergate Bank, all within a short time, has instilled fears of another 2008-like financial crisis. While policymakers continue to assure the public that they are working on a recovery plan — with the Biden administration announcing measures to protect depositors — the bank run created a panic in U.S. markets.
A bank run happens when the majority of depositors at a particular bank decide to withdraw their funds at the same time. Most banks don’t have all depositors’ money on hand since — under the fractional reserve banking system — banks are only required to hold a percentage of customer deposits at any time.
The system has been successful for a long time, but every decade or so, a bank run happens, laying bare the banking system’s vulnerability.
These banks experienced asset-liability mismatches due to higher deposits than credit during the COVID-19 pandemic. This led to banks’ excess use of liquidity in public and private sector bonds. However, with rapid interest rate hikes by the U.S. Federal Reserve, these banks incurred enormous losses, eventually leading to a liquidity crisis.
The asset-to-liability mismatch, although common in most situations for banks, was untenable in the current scenario due to the sharp decline in deposits.
Crypto gets tangled in the US banking crisis
The crypto industry has faced much criticism in recent times owing to a slew of high-profile collapses and losses for investors. However, in the case of SVB, crypto’s involvement was less causational and more due to counter-party risk on the part of stablecoin issuer Circle.
Following the downfall of SVB on March 10, USD Coin (USDC) issuer Circle announced that nearly $3.3 billion of the reserves backing USDC were stuck in SVB.
The announcement drastically affected the…
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