The Banks Are FAILING!! SVB Collapse & Everything It Means!!

The second biggest bank failure ever the Largest bank run since the great Financial crisis a potential quote Extinction level event for startups and The cause of the worst stablecoin Debegging since terror's UST the Collapse of Silicon Valley Bank is Rippling out through the economy and Those ripples could turn into a tsunami If the bank run spreads to other Banks So in this video I'm going to tell you Exactly what's going on with Silicon Valley Bank and how it could impact not Only the crypto space but the broader Economy as well don't go anywhere Let's start with a quick bit of Background to catch you up Silicon Valley Bank or svb was a 40 year Old Bank based in Santa Clara California At the time of its insolvency it had About 209 billion dollars in assets and Was the 16th largest bank in the United States Svb made a name for itself on the Startup scene they claimed to have Banked at least half of the US's Venture-backed startups talk about Centralization they managed to do this By offering attractive loans to startups In return for these startups using them As an exclusive Bank Not only that but given that svb was one Of the best known banks in the valley For startups they had a strong

Relationship with those startup Founders And the VCS that backed them For example svb also provided personal Banking services to these Founders as Well as offering attractive mortgage Deals this created additional incentives For these Founders to use the bank for All those buckets of cash that they Raised from the VCS Svb was also FDIC insured but as many Should have known FDIC insurance only Protects accounts that hold up to two Hundred and fifty thousand dollars Startups which usually have immense Capital commitments cannot practically Hold accounts with balances below that Figure For example for a startup passed a Series a raise simple monthly payroll May already exceed 250k so what we had With svb was a situation where over 85 Percent of the funds that were deposited With the bank were in accounts over the 250k balance quite simply if the bank Were to go bust customers would have to Enter the receivership queue The problems were broader than that Though given how flush with cash the Startup scene was svb could not Originate loans nearly as quickly as Money was coming in for example deposits Jumped from 61 billion at the end of 2019 to 189 billion at the end of 2021. To take from their form 10K two weeks

Ago quote much of the recent deposit Growth was driven by our clients across All segments obtaining liquidity through Liquidity events such as IPOs secondary Offerings SPAC fundraising Venture Capital Investments Acquisitions and Other fundraising activities which During 2021 and early 2022 were at Notably high levels end quote What this meant was that svb had a lot Of assets that they needed to generate a Return on I mean how else are they going To make money sure they can charge fees But that's so vanilla plus no risk no Reward right this is Silicon Valley After all So in order for them to generate a Return while still investing in Relatively safe assets they decided to Buy longer dated Securities these Included the likes of Treasury bonds and Mortgage-backed securities This buying took place at a time when Rates were near record lows as a result Of this Bond buying frenzy by the end of 2022 svb had over 120 billion dollars in These Securities versus only 74 billion Dollars in loans quite simply it was More a fixed income hedge fund than a Bank Now this is all well and good when the Deposits are still rolling in and rates Are still low it's quite a different Kettle of fish When the tide turns when

The FED started raising rates Aggressively last year it caused a great Deal of excess VC Capital to dry up the Risk return of investing in startups was Less attractive than investing in bonds And government debt which were now Yielding much more attractive returns Therefore startups found it a lot harder To raise capital and hence there wasn't A steady stream of deposits going into Svb so one of the main components that Had helped the bank grow so quickly was Now slowing down then on the other side Of the balance sheet you had all those Fixed income securities these were the Longer dated kind which means that they Were naturally more sensitive to Interest rate changes the moment that These rates started to increase the Value of these bonds started to fall What was even more problematic though Was that svb didn't have any sort of Interest rate Hedges or other risk Management in place So to borrow from the analysis of Alf Over here a bond portfolio of 120 Billion dollars with an average duration Of 5.6 years means that for every 10 Basis point rise in the five-year Treasury the bank lost about 700 million Dollars I'll leave you to do the numbers On an over 200 basis point rise So the balance sheet was a ticking time Bomb as those rates started going up so

Too did losses start piling up at the End of 2022 svb had marked Market losses On those Securities in excess of 15 Billion dollars almost equivalent to its Entire Equity base of 16.2 billion Dollars however because a great deal of These were quote held to maturity assets They didn't have to sell these bonds or Realize those losses that is until they Needed the money in order to meet the Demand from their depositors according To Reuters svb got a call from Moody's The ratings agency they told svb that They were planning to downgrade the bank On account of the falling value of its Bonds worried that this could further Precipitate a crisis svb called in the Goldman Bankers for advice The plan was to sell 20 billion dollars In lower yielding bonds and reinvest That into assets that delivered higher Returns by doing so they would have to Realize losses of up to 1.8 billion Dollars however svb and Co were of the View that they could make up for the Shortfall with a share sale they had a Pretty solid plan lined up and had there Been enough time to get the proper Confidentiality agreements in place they Would have been able to complete it Moody's only downgraded them by one Notch with the understanding that the Share sale raise would go ahead and that There was a plan to recapitalize the

Bank however it all happened too fast Once news got out about this potential Share sale the stock plunged it fell by 60 percent last Thursday to 106 dollars While Goldman still thought that the Share sale could go ahead things were Made infinite worse when Venture Capital Firms started advising their portfolio Companies to withdraw funds from the Bank and with that the genie was out of The bottle Now A Bank Run is a self-fulfilling Prophecy and the moment it starts you Know you don't want to be lost in the Queue quite predictably it led to a Collapse of svb into the hands of the FDIC a number of stories began to emerge Over the weekend of startups and Founders that were scrambling to Withdraw their funds from the bank Remember that svb banked over 50 percent Of U.S startups that's around 65 000 companies then you also have all the Founders who personally banked with them That statement of the quote extinction Level event for startups came from Gary Tan the CEO of Y combinator Over the weekend there were legitimate Concerns by thousands of startups over How they were going to make payroll in The new week However the svb collapse had a Particularly significant impact on Another large company a company that had

Embedded itself right in the heart of The crypto economy I am of course Talking about Circle Now svb was one of the banks that Circle Financial used to store cash reserves That backed up its usdc stablecoin this Is important because as a fiat-backed Centralized stablecoin the assumption is That every coin issued is backed by an Equivalent dollar amount somewhere else As soon as you realize that that isn't The case you know that it's technically Not worth a dollar This fear caused usdc to slip off its Peg this continued over the weekend as More and more people rushed to convert Some of their usdc Holdings then Circle Made the announcement that 3.3 billion Dollars of its 40 billion dollar Reserves were held at svb this therefore Meant that at least eight percent of the Reserves that were supposed to be Backing all of the outstanding usdc was Potentially inaccessible this further Precipitated the fud as people now knew That assuming some haircuts usdc Wouldn't be worth one dollar There was also the fear that this Realization could lead to a flood of Redemptions when the banks opened on Monday morning Beyond that there was the question of Whether the bank runs would spread Circle kept its cash at a number of

Other Banks and I'll leave a link to the Full list in the description of course This was definitely nothing like the UST Situation everyone knew that Circle had A large stack of government-backed Securities at BlackRock There was always going to be a flaw to The value of usdc but the question was Where was that floor and who was willing To take the haircut thankfully over the Weekend Circle came out with a strong Statement about their reserves and the Exposure to svb They said that usdc liquidity operations Would begin as normal on Monday morning Moreover they gave a more detailed Breakdown of where the bulk of their Cash Holdings were the bulk of them are At bny melon which you can consider to Be a too big to fail Bank there was also The possibility that Circle would use Company funds or complete a fundraise to Plug the hole moreover there were Murmurs of some sort of Recovery Fund or Rescue operation for svb more on that in A bit all of these factors combined led To usdc slowly regaining its Peg by Saturday night But the broader question was now whether This Bank Run would spread to other Banks because that is what bank runs Tend to do The conditions were ripe for a run there Were many banks with similar structures

To svb Now on the asset side there's this handy Chart over here which shows the Unrealized losses that banks are sitting On for their fixed income securities Would any of these Banks also be in a Precarious liquidity position should They sell these assets but let's assume That they had better managed their Interest rate risk they still have large Uninsured deposits that wouldn't be safe If they were above the FDIC cap over the Weekend there were many people who saw What happened to svb and wondered Whether their Bank was potentially next Remember the first rule of a bank run You don't want to be lost as such people May have decided that they were going to Pull their funds out of a bank that the Feds would allow to fail and hold it in One that they wouldn't I.E a too big to Fail Bank this could be the likes of JPMorgan Bank of America City bny Mellon Etc but this then raises the question of How fragile the U.S banking system is in General Consider this 22 trillion dollars in the banking System the FDIC has 124.5 billion Dollars on its balance sheet as well as A 100 billion line of credit from the Treasury What that means is that the FDIC only Covers roughly 1.3 percent of all

Deposits that's right 1.3 percent So despite the assurances of the FDIC The prospect of a large and cataclysmic Bank Run was immense remember that the Fractional Reserve banking system is Nothing but a confidence game If Market participants lose confidence In the security of their deposits then They head for the exits this is perhaps The reason why there were so many people Calling for some intervention or Announcement from the FED treasury or Both Now of course the word bailout is pretty Toxic the notion that taxpayers should Be held liable for the losses of a bank Is ludicrous especially when that bank Was in the position because of its own Poor decisions you can't privatize gains And socialize losses that's not how Capitalism works however there should be A distinct difference drawn between the Senior Management and shareholders of a Bank and the customers who have funds Stored there Those startups and Founders use the bank Because it was well known to the Industry it's a bit far-fetched to Expect them to have done an in-depth Analysis of the balance sheet and Capital ratios before deciding to bank There moreover while this was the Silicon Valley Bank that didn't mean its

Customers Were Somehow less deserving we Should not forget that there were over 65 000 startups that had some exposure To svb if they can't make payroll they Will fail and their employees will hit The job market These are companies that could have Become massive engines of growth in the Future therefore the collective disdain That some may have for the plight of These customers is unwarranted and Unhelpful not only that but as I've Pointed out Bank runs don't discriminate Based on who the customers are if the Svb Run was to get worse then it could Spread to many of the smaller Regional Banks what happens if these start to Fail do the depositors matter then at The end of the day those most at fault Are the ones in power the policy makers Shut down the economy and flooded it With cheap money This money was then allocated to areas That could earn higher returns given the Rock Bottom rates that Banks were Offering not only that but this easy Money led to some runaway inflation that Was anything but transitory and once They realized that that was a mistake They quickly reversed course and have Been aggressively increasing interest Rates ever since This has sucked liquidity out of the System and has led to the massive losses

That we've seen on bank balance sheets Not only that but the bank Regulators Were asleep at the wheel I for one was Flummoxed to learn that a bank with over 120 billion dollars in fixed income Securities had zero interest rate Hedges And if this information was publicly Disclosed in their financial reports It's crazy to think that this did not Raise alarm Bells at these banking Agencies Perhaps they were just all too busy Attacking the crypto sector and seeing How they could unbank that more about All of that in the description Either way it was good to see The Regulators finally scramble over the Weekend to shore up confidence in the Banking system on Saturday evening it Was reported that the FDIC and the FED Had been in discussions with banking Executives about a fund that would Backstop deposits in addition to this it Was also reported that the FDIC was Holding numerous calls with banks such As First Republic that were in similarly Precarious positions and then came The Joint statement on Sunday night by the Treasury Federal Reserve and the FDIC They announced that they would be Backstopping all the deposits at svb and That customers would have access to Their funds come Monday morning this Helped to shore up confidence in the

Banking sector and in circles reserves Usdc managed to regain its Peg by Monday Morning and has managed to maintain it Since then well at least at the time of Shooting this video Now some were relieved at this decision By U.S authorities others incensed but It has managed to prevent a wide-scale Banking crisis at a time when that is Really the last thing that we need So what does this all mean for the Markets well it's not good it shows that Not only are banks badly managed but Those that are supposed to be overseeing Them are asleep at the wheel it shows That the volatile monetary policy of the FED is having severe impacts on bank Balance sheets it shows that the Fractional Reserve banking system is Structurally unstable and is One bank Run away from being a systemic risk it's Also net net a negative for the crypto Space that's because buried in that Aforementioned statement was the Announcement that Signature Bank had Also been forced to shut down now Signature was one of the few U.S banks That remained friendly to the crypto Sector coupled with the collapse of Silvergate it means that in less than a Week the sector has effectively been Unbanked I also worry that those in Power will try to blame these banking Collapses on the crypto sector in some

Way let's not forget that Elizabeth Warren was dancing on the grave of Silvergate even though she managed to Propagate the flood campaign that led to Its run is that a bad thing well short Term it's going to stifle the industry's Growth potential it could set us back to 2014 when many banks didn't want to work With the industry but as we've seen the Traditional banking system itself is Really unstable The reason why usdc de-pegged is because Circle stored its reserves with a bank That dependence on the traditional Financial system led to usdc's biggest De-pegging yet so perhaps in the long Run this could further help reinforce The need for a completely decentralized Safe and permissionless financial system That was after all satoshi's ultimate Aim but until that time comes we'll have To live with the vagaries of the Legacy System Okay folks if you enjoyed this video Then smash that like button and don't Forget to subscribe if you want to get More of me off the tube then I highly Encourage you to check out our socials Page it has links to my Twitter telegram Tick Tock and Instagram it's also where You can find the link to my newsletter Where I share a breakdown of all the Upcoming videos on the channel so be Sure to check it out that's all for

Today folks enjoy the ride keep calm and Huddle on