The month of March brought multiple bank failures, and they all started with the unlucky letter “S”. Sheer panic quickly ensued among Venture Capitalists and founders as they watched their banks implode.
During March 2023, two large banks in the U.S. with significant exposure to the technology sector or to cryptocurrency failed, while another entered liquidation under financial distress.
By March 16th, large interbank flows of funds were occurring to shore up bank balance sheets and many analysts were reporting on a more general U.S. banking crisis. Many banks had invested their reserves in U.S. Treasury securities, which had been paying low interest rates. As the Federal Reserve began raising rates in 2022, bond prices declined decreasing the market value of bank capital reserves, leading some banks to sell the bonds at steep losses as yields on new bonds were much higher. Eleven of the largest U.S. banks provided up to $30 billion to support the teetering San Francisco-based First Republic regional bank.
“S” banks imploded in this order:
“S” #1 – Silvergate Bank
The first bank to fail, cryptocurrency-focused Silvergate Bank, announced it would wind down on March 8th due to losses suffered in its loan portfolio.
“S” #2 – Silicon Valley Bank
Two days later, on March 10th, upon announcement of an attempt to raise capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be seized by regulators that day.
“S” #3 – Signature Bank
Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12th, with regulators citing systemic risks.
The collapses of Silicon Valley Bank and Signature Bank were the second-and third-largest bank failures in the history of the United States, respectively, smaller only than the 2008 collapse of Washington Mutual during the global financial crisis.
Some more background:
Silvergate Bank is a California-based bank that began operations in 1988 as a savings and loan association. In the 2010s, the bank began to provide banking services to players within the cryptocurrency market. The bank sought regulatory approval in the summer of 2014 to do business with cryptocurrency firms. The bank expanded the assets on its balance sheet significantly—doubling its assets in its 2017 fiscal year to $1.9 billion—by servicing cryptocurrency exchanges and other companies who were involved in the cryptocurrency business that could not secure financing from larger, more conservative banks. By the fourth quarter of 2022, 90% of the bank’s deposits had become cryptocurrency-related, with over $1 billion in deposits being tied to Sam Bankman-Fried. Oops!
Silicon Valley Bank (SVB) was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States and was heavily skewed toward serving companies and individuals from the technology industry. Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB. Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc.have been clients of the bank. In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs. According to the Federal Deposit Insurance Corporation (FDIC), it had $209 billion in assets at the end of 2022.
Signature Bank was a New York City-based bank founded in 2001. The bank provided financing within the multifamily residential rental housing market in the New York metropolitan area beginning in 2007, though it began to reduce its exposure to the market during the 2010s. By 2019, just over four-tenths of the value of the bank’s loans were made to multifamily homeowners in the New York metropolitan area, comprising $15.8 billion of the bank’s then-$38.9 billion in net loans.
Beginning in 2018, Signature Bank began to court customers in the cryptocurrency industry, securing hires that were experienced in the area with the goal of moving away from its dependence on real estate lending. The quantity of deposits held at the bank expanded significantly, with deposits increasing from about $36.3 billion at the end of the 2018 fiscal year to $104 billion by August 2022; that month, over one-quarter of the bank’s deposits held were those of cryptocurrency companies. Its cryptocurrency-sector clients included large cryptocurrency exchange operators, such as Celsius Network and Binance. By early 2023, Signature Bank had become the second largest provider of banking services to the cryptocurrency industry—second only to Silvergate Bank.
Is it just me or does it seem like Signature Bank should have stayed with multifamily real estate lending? Oops!
Outside the United States
“S” #4 – Credit Suisse (doesn’t start with “S” but it’s in there!)
UBS agreed to acquire Credit Suisse on March 19th in an all-stock takeover valuing Credit Suisse at 3 billion Swiss francs ($3.2 billion). The acquisition was supported by a 9 billion Swiss francs short term loss guarantee from the Swiss government and $108 billion of liquidity from the Swiss National Bank.
Lastly, Chinese banks had suffered a less severe impact from the banking crisis. According to Bloomberg News, almost all of the 166 top performers during the March 2023 US bank failures were in China. The recent banking crisis in the U.S. and Europe highlighted the relative stability of the Chinese banking system. While China’s recovery from the pandemic remains fragile, inflation there is muted, and the People’s Bank of China had adjusted interest rates at a slower pace than Western central banks.
In our opinion, while extremely unfortunate, these bank issues won’t likely become our issues. In fact, following the initial shock of these failures, countless banks that we deal with reached out to us in order to assure us they were doing great and had no relationship with or exposure to any of the banks we’ve discussed. They all remained excited about our relationship and the strong real estate deals we produce. We believe direct participation real estate (DPRE) investing will continue to be a bright spot in an otherwise dismal investment world.
Source: Bloomberg & Wikipedia
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