Payments

The failure of SVB and Signature Bank raises concerns

When word broke this week that Silicon Valley Bank, the 16th largest bank in the United States, was in freefall, the banking industry received a lot of attention from the mainstream media. The same thing happened at Signature Bank shortly after, making this the third worst banking failure in American history.

There are many unknowns and a lot of false information circulating around how this happened and what it implies for financial institutions and the US economy overall, as is the case with such occurrences.

Establishing the scene
According to a Guardian story, Silicon Valley Bank is well recognized for being a significant investor in the technology industry; thus, when COVID-19 struck the world in 2020, there was a huge boom for tech firms and digital entrepreneurs.

Consequently, these internet firms and startups started to put a lot of money into SVB Bank, which used it to make investments, especially in U.S. government bonds, many of which were mortgage-backed.

But in order to fight inflation, the Fed started raising interest rates in recent months, which led to the failure of government bonds. Then, because of the unstable economic climate, IT businesses started to withdraw their investments, making matters worse.

SVB was in serious trouble since it lacked the funds to cover these withdrawals. As a result, it started selling bonds at a loss and declared on March 8 that it needed to raise $1.75 billion.

Then, in a panic, depositors raced to the bank to retrieve their money, taking out an incredible $42 billion, leaving SVB with a $958 million negative cash position.

In order to protect depositors, the U.S. government intervened and took over the bank on March 10.

How about Signature Bank?
Due to its $16.5 billion in deposits from clients with a connection to digital assets, Signature Bank was also active in the technology sector, namely in the cryptocurrency space. AP News reported that the bank’s assets were over $110 billion.

However, when depositors started to pour money into the bank and withdraw over $10 billion in deposits, the bank was caught in the crossfire of the SVB freefall, and the government took control of it as well.

Some, however, contend that the government’s action had a completely different objective than merely safeguarding the financial system.

Former U.S. Representative and Signature Bank director Barney Frank, who wrote the Frank-Dodd Act during the 2008 financial crisis, thinks the government took over the bank to make a statement.

“This was just a way to tell people, ‘We don’t want you dealing with crypto,'” Frank stated to the Associated Press.

On March 12, Frank made it clear that the pullout issue was under control, but the government still intervened. He anticipates that Signature Bank will eventually be sold.

Frank told the news organization, “I think they’re going to get a very good price.” “Proof that it was not a bank problem.”

Both SVB and Signature Bank are now covered by the Federal Deposit Insurance Company, which the government claims will protect all deposits, including those exceeding $250,000.

What does this mean, then?
Although some have speculated that this would be another 2008, things have changed since then. First off, it was extremely difficult to evaluate mortgage-backed securities in 2008, but it is much simpler to value and sell the bond assets that caused this problem with SVB.

Second, unlike 2008, the government intervened early to avert a disaster, according to a CNN article.

Following these disclosures, bank stock did, however, decline, which may have a detrimental effect on the economy.

The Fed’s decision to halt its interest rate-raising program has also come under scrutiny. As Greogy Daco, senior economist at EY, told CNN, “risking a loss in the battle against inflation is not something Fed Chair Powell wants to do,” the Fed is probably not going to back down.

How about cryptocurrency?
Customers may not have understood the message the U.S. government was attempting to convey about cryptocurrencies.

Indeed, as investors look to cryptocurrencies and other alternatives, Nigel Green, the CEO and founder of deVere Group, thinks this might be a “springboard event” for bitcoin.

In a news release, Green stated, “Bitcoin is up as much as 20% during a historic banking crisis.” “It’s acting as a safe haven asset as the collapse of tech-focused Silicon Valley Bank sparks fears across Wall Street of contagion in the banking system, which many say was being crippled by a relentless agenda of interest rate rises.”

According to Green, quantitative easing, which “increases the supply of the dollar in circulation,” is what the SVB rescue plan does. As a result of the increasing supply of money, the buying power of the U.S. dollar may decline in comparison to other currencies. This inevitably forces investors to search for substitutes, like the finite quantity of bitcoin.

What actions ought banks to take?
In an effort to allay consumer concerns, banks have launched a number of ads highlighting their safety, solvency, FDIC protection, and other attributes.

In a LinkedIn post, EJ Kritz, EVP of APC, a consulting business that focuses on customer and employee experience, stated that banks were taking this action to provide “customers a sort of security blanket that they think they need.”

“It’s not about whether banks can get their customers to trust you today,” Kritz says, suggesting that banks could be making a mistake. It concerns if they had faith in you prior to SVB. Last week, did they trust you? No amount of marketing can go back in time and win back the trust of customers if they didn’t.

Kritz stressed that banks should actively connect with their clients by teaching their staff to do so and by using resources like surveys, KPIs, problem-solving tools, and more. Instead of being left “to whither on the vine,” banks should do just that.

Additionally, he said that mass communication is ineffective and banks are not a popular sector. In order to address their clients’ demands amid difficult times, banks must instead pay attention to what they have to say.