Q9 Weekly | Too Big to Fail?
16 March 2023
- Crypto rallies as SVB and Signature Bank collapse
- Credit Suisse adds to bank fears, shares tumble
- USDC regains 1:1 peg after 13% drop
Crypto markets experienced a surprising surge over the past few days, with Bitcoin and Ether rising by 12% and 8% since last Friday. Bitcoin reached a nine-month high on Tuesday at about $26,500. The breezes of bullishness came despite a wave of bank failures within the last week that would seem to suggest a rocky road ahead for the economy.
The rally reflects the current “bad news is good news” environment, in which anything that makes a Fed interest rate hike less likely (including negative news about the real economy) is bullish for asset markets.
As three US banks collapsed and one European bank teetered within a week, renewed attention came to Bitcoin as a censorship-resistant non-sovereign alternative asset that cannot be debased.
Sign on the Dotted Line
Signature Bank followed SVB and emerged as the latest institution to collapse amid a series of bank failures. On Friday, customers spooked by the sudden collapse of SVB withdrew more than $10bn in deposits from Signature. Regulators announced that Signature was being taken over to protect its depositors and the stability of the financial system.
SVB and Signature rank as the 2nd and 3rd largest bank collapses in US history.
Largest US Bank Failures Since 2018
Source: Barrons
Regulators are now conducting a sales process for the banks, while guaranteeing that customers will have access to deposits and service will continue uninterrupted.
Like Silvergate, Signature was a cornerstone of the crypto industry. It created a 24/7 payments network for crypto clients and had $16.5bn in deposits from digital-asset-related customers. SVB meanwhile provided much needed funding and deposit services to tech and crypto startups. However, any buyer of Signature must agree to give up all the crypto business at the bank according to sources.
Coinbase, Paxos and Circle all disclosed exposures, as did many others.
Debit Suisse
Banking giant Credit Suisse plans to borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back about SFr3bn of its debt, in an attempt to boost its liquidity and calm investors a day after the bank’s share price plummeted.
The Swiss central bank said it would provide a liquidity backstop to Credit Suisse after the lender’s shares fell as much as 30% and sparked a broader sell-off in European and US bank stocks. BNP Paribas, Société Générale, Deutsche Bank, ING and Barclays lost between 9 and 12%.
Investors sell-off European bank stocks
Source: FT
Bond markets have been turned upside down across the world, with the two-year yield in the US now some 120 bps lower than a week ago. US and European regional banks, after the multiple failures of last week, are the area of a greatest concern.
However, JPMorgan analysts believe it is unlikely that Credit Suisse will be allowed to fail because of its importance to the Swiss economy and Zurich’s status as a global financial centre. With the Swiss authorities standing behind Credit Suisse, it seems highly unlikely that a liquidity shortfall will sink it. This makes a classic bank run much less likely.
Circling Back
USDC regained its peg following a run on the stablecoin.
Circle, the firm behind USDC, held approximately $3.3bn of its cash reserves with failed bank SVB. While these funds make up roughly 8% of USDC’s $40bn reserves, they are importantly the most liquid (the majority of reserves are held in treasuries with BNY Mellon).
There was fear among USDC holders that Circle’s ability to meet redemption requests may be severely impacted. As a result, USDC holders rapidly fled the stablecoin resulting in an all-time-high deposit level on CEXs and a liquidity crunch within DeFi.
The rapid decline in USDC demand caused the price to fall over 13% by Saturday morning to a low of $0.87 before ultimately recovering its 1:1 peg once Circle assured redemptions would flow normally come Monday. Cross River Bank is taking over as Circle’s commercial banking partner
“Trust, safety and 1:1 redeemability of all USDC in circulation is of paramount importance to Circle, even in the face of bank contagion affecting crypto markets,” co-founder and CEO of Circle, Jeremy Allaire, said in the statement.
USDC Re-Pegs After Exposure
Source: CoinGecko
However, the combined market cap of the top three dollar-pegged stablecoins (USDT, USDC and BUSD) continues to slide. The divergence reflects investor preference for assets detached from traditional finance (ie Bitcoin).
Market Cap and Volume of Top 3 Stablecoins
Source: Matrixport Technologies
Banking on Crypto
BlackRock chief executive Larry Fink has raised the spectre of a “slow rolling crisis” in the US financial system following the failure of SVB, Signature and Silvergate, “with more seizures and shutdowns coming”. It is an example of the “price we’re paying for decades of easy money”.
“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector [akin to the Savings & Loan Crisis of the 1980s] with more seizures and shutdowns coming.”
The fresh banking crisis has resulted in crypto companies and users scrambling to move their assets as the industry lost a number of crucial banking ramps. With these closures, it will now become even harder for crypto businesses to move money between entities and access banking services — Silvergate and Signature served as the major on- and off-ramps for the crypto space with their SEN and Signet products, whilst SVB served major startup and VC capital for the space.
Yet this isn’t a sign of crypto weakness. It’s a sign of weakness in traditional banking. Each of these failures is the result of poor risk management, opaque business practices and moral hazard. And without wishing to absolve banks like SVB of their guilt (they were of course taking stupid risks), it must be stated: The fact that it could come to this point at all is the consequence of a decade of absurdly loose monetary policy and unaccountability — which is now coming to an end.
The era of Covid-induced stimulus low interest rates, and loose monetary policy is over. Banks (especially those exposed to duration risk) are under immense pressure, more will likely fail and central banks will have to intervene.
Bank runs like this are why Bitcoin exists… as an alternative money and payment system that has no central vulnerability, no opening hours, no CEO, no one to block an account, and is always available to everyone around the globe. It is more relevant than ever… and these events will further shift finance towards decentralization.
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