3 Successive Bank Closures: What Happened and What It Means for Startups and the Crypto Market

What Happened and What It Means for Startups and the Crypto Market

From Silvergate to Silicon Valley Bank, here is how bank failures will shake up the financial markets.

The recent spate of bank failures in the U.S. has sent shockwaves through the financial world, with experts warning of a repeat of the 2008 crisis. In just one week in March, we saw the failure of two banks—Silvergate Bank, which announced plans for liquidation, and Silicon Valley Bank (SVB), which struggled to cut losses on bond investments because of inflationary conditions. The final nail in the coffin of the American banking system was the closure of Signature Bank by state regulators. 

But to fully understand whether there is a fear of another financial crisis, we need to know why these banks are falling one after another. Here is a look at the reasons behind these bank failures and what this means for startup founders. 

So, what happened to the banks?

Silvergate Bank’s crypto exposure spells its demise

With Silvergate, a bank that caters to the crypto market, the reason for its failure is apparent. The bank lent money to FTX, a crypto exchange that went bankrupt late last year, thereby bringing the bank down along with it. 

Earlier this year, Silvergate released its earnings report which revealed a net loss of US$1 billion ‌in the fourth quarter of 2022. Customers were struggling to trust the bank amid the FTX situation, with many choosing to pull out funds from their accounts. By January 2023, US$8.1 billion worth of deposits had been withdrawn from Silvergate’s treasury. While the bank has promised to reimburse customers, the incident raises concerns about the risk of banks that are closely tied to the volatile world of crypto.

Silicon Valley Bank faces bond investment losses amid tech downturn

As the name probably already tells you, the bank largely caters to tech startups in Silicon Valley. Previously, we discussed how the tech industry across the world is going through a downturn. Amid this downturn, venture capitalists (VCs) began closing their wallets, which forced startups to withdraw their deposits from the bank. However, this withdrawal was more than what the bank could pay back, leading to a crisis. 

To make matters worse, SVB had been investing a large part of the deposits it received in U.S. government bonds, a relatively safe investment vehicle. Unfortunately, these bonds have recently been seeing a drop in value because of inflationary conditions. Thus, to give the customers their money back, SVB sold US$21 billion of its government securities portfolio at a loss of US$1.8 billion.

Signature Bank succumbs to panic after SVB’s collapse

With Signature Bank, which was also a crypto-friendly bank, the closure was a result of the panic caused by the failure of SVB. Following the collapse of SVB, Signature Bank saw its depositors withdraw 20% of its deposits. 

On March 12, Signature Bank was taken over by the New York Department of Financial Services (NYDFS) to prevent a similar outflow of depositors (as was the case with SVB) from occurring again. 

Signature Bank, of which FTX was also a client, was able to handle the FTX bankruptcy better than Silvergate Bank. This was due to Signature Bank’s more diversified customer base, with cryptocurrency making up only 25% of its deposits. 

What does the closure of these banks mean?

Silicon Valley Bank

The sudden closure of SVB has sent shockwaves through the tech industry. Many of SVB’s clients, including startups, VCs—nearly 2,500 VC firms banked with SVB—and angel investors, are now facing uncertainty as they try to navigate a future without the support of the bank. The impact of SVB’s closure is not just limited to the U.S.; its clients in other countries and regions, such as Southeast Asian VCs like Jungle Ventures and Golden Gate Ventures, will also feel the fallout.

Startups that relied on SVB for funding and support may struggle to make payrolls, and industry insiders say that some tech startups might have to conduct mass layoffs to cope with the bank’s failure. This, coupled with the fall in VC funding and the rise in interest rates, which have already put startups in a precarious position, could mean the death of a lot of small businesses. 

Silvergate and Signature

The collapse of Silvergate and Signature Banks is expected to have far-reaching effects on the crypto industry, with both banks holding assets worth US$11 billion and US$114 billion respectively. These banks were vital to the industry, with their payment systems, Signet and SEN, moving US$2 trillion worth of assets into the crypto market. The vacuum created by their absence will be felt, as crypto businesses previously relied on wire transfers which were expensive, slow and only possible during banking hours.

While other banks may step in to fill the void, Silvergate and Signature Banks have lent credibility to the industry. Moreover, the involvement of government regulators in Signature and the market fears surrounding crypto in the recent past would discourage other banks from engaging with crypto. 

All of this doesn’t bode well for either startups or the crypto market. For now, Silvergate has assured customers of the return of the deposits, and Signature’s accounts have been transferred to Signature Bridge Bank, where customers can access their funds in the same way as before. 

With SVB, the Federal Deposit Insurance Corporation (FDIC, a government corporation that provides insurance to customers of commercial banks) has taken over the liquidation process and has confirmed that all deposits will be reimbursed. Hence, things might not be all that bad—at least for the customers. 

Ultimately, only time will tell how these closures will impact the economy and various industries. Still, it is crucial to monitor the situation closely and take appropriate measures to ensure stability and growth of both the crypto markets and the startup ecosystem. 

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Header image courtesy of Envato

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