Hey fintech friends,

At the time we're hitting "Publish" on this post, there are still more open questions than there are answers about the past week's bank collapses. It feels like now is a good time to recap what's happened, how we got here, and the takeaways so far.

tl;dr

• Three banks have failed: Silicon Valley Bank, Silvergate Bank, and Signature Bank had a combined deposit base of $329 billion.
• A government backstop will ensure that 100% of account-holder deposits are paid out, and the FDIC, Federal Reserve, and White House are creating a new Bank Term Funding Program to lend banks money against deposits.
• These banks are failing due to a combination of duration mismatches and sector overconcentration.
• Other banks currently under similar stress scenarios include Provident Bancorp (PVBC), Customers Bancorp (CUBI), New York Community Bancorp (NYCB), and Metropolitan Bank (MCB).

Recap: What’s happened since March 8?

Over the past week, we’ve witnessed a series of the so-far fastest bank runs in US history. The institutions that have collapsed are not tiny, unsubstantial banks:

In the 1980s, the economy overheated while interest rates climbed into the range of 8%-20%, and a string of bank runs caused 1,617 banks to fail in what has been dubbed the “Savings and Loan Crisis”. These runs were caused by a combination of factors:

1. Banking deregulation
2. Severe regional and sectoral recessions
3. Limited supervisory oversight of bank risk management practices

The latest bank failures are to a large extent echoing these themes.

Why banks are failing now

If you're reading this newsletter, you're probably familiar with how banks make money i.e. profiting on the spread between interest paid for deposits and interest charged on loans (we covered net interest income for those who want to nerd out a level deeper).

Banks also need to maintain capital ratios that ensure they'll always have enough money to let depositors withdraw their funds. SVB's and Silvergate's common equity Tier 1 capital ratios were reasonably higher than what's required by regulators, at 15.26% and 53.42% respectively vs. the Fed's 4.5% requirement. But when markets started tightening last year and customers started running down deposits, SVB and Silvergate had to shore up liquid funding to cover the increases in withdrawals.

Last week, Silvergate announced it was doing so by selling chunks of its bond portfolio; SVB announced it would start selling off equity, which plunged stock at both institutions and triggered a frenzied run on the banks. Signature Bank was swept into receivership by state regulators amid concerns that its crypto exposure would lead to another failure (but its leaders argue that it would have survived, and that their closure had more to do with regulators’ disapproval of crypto).

So far, HSBC has stepped in to acquire SVB's UK business for a whopping £1 and the US's FDIC, Fed and Treasury have jointly announced that they will backstop deposits at closed banks and make funding available to banks who may start feeling similar pressure on liquidity.

And yet, the banks most heavily indexed to the startup and crypto worlds are not out of the woods. First Republic bank’s stock fell over 50% the day after the FDIC announced that it would backstop SVB depositors, as more account-holders scramble to pull their funds from non-top 20 banks.

As short seller Edwin Dorsey wrote in November ‘22, Provident Bancorp (PVBC), Customers Bancorp (CUBI), New York Community Bancorp (NYCB), and Metropolitan Bank (MCB) all took on business from the most quickly-growing fringes of tech in the past few years. Provident rebranded as BankProv and attracted “over $100 million in “digital asset customer deposits,” while its “loans to digital asset companies” increased from $15 million in December ‘20 to $138 million in June ‘22.

How is this happening to banks who, on paper, maintain such strong capital positions?