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Silicon Valley Bank: the implications for central banks and crypto markets

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The UK stock market is likely to see more pressure as traders become increasingly nervous about the health of the financial sector. Investors remain concerned about potential spill overs to other areas of the market and new failures in the wake of the collapse of Silicon Valley Bank (SVB) in the US.

Many banks saw their share price come under pressure as the sell-off hit larger institutions as well in the US and Europe. In the UK, HSBC in particular could remain under scrutiny after it took over the UK arm of failed SVB.

While the move has helped stop the panic to a certain extent, it exposes the bank to SVB’s issues and the attention of the markets. HSBC has announced plans to inject 2 billion pounds into SVB’s UK arm which could help secure operations in SVB.

“Taking over SVB in the UK could also give HSBC better exposure to the local tech sector, opening a new front for the large bank in a dynamic sector,” said Daniel Takieddine, CEO for the MENA region at BDSwiss. “The acquisition could help the bank nurture a potential pool of future large clients as they have the capacity to grow strongly.”

At the same time, the tax incentives and investment zones announced by the British government could boost the economy. Such initiatives could be necessary to prop up the lagging economy and stave off the impact of the banking sector’s woes.

It remains to be seen how central banks will react to the current confidence crisis in the banking sector and whether their interest rate decisions will lead to a calmer market.

“The proverbial jug goes to the well until it breaks whilst the literal central bank can only raise rates until the damage from associatedblow ups reaches a critical level,” noted fund manager Marco Pabst, CIO at Arbion. “Have we reached this point with Silicon Valley Bank failing? Probably not but it is clear that the increase in risk-free rates is exposing more and more of the weak players in the economy. The famous Warren Buffett quote perfectly nails the current environment and, unfortunately, I believe we will see more accidents like these happening in the future as management ineptitude, greed, operational weaknesses, outright fraud and poor risk management practices are being revealed.”

Pabst said that in an environment where the price of money was zero and liquidity abundant, there was no catalyst to bring about the unravelling of an otherwise untenable situation. “Zombie companies with no earnings and no prospect of generating sufficient returns have been kept alive by ignorant investors for too many years,” he noted.

Policy ball batted back to central banks again

“There is an old saying across trading floors in the City that “Central Banks keep raising rates until something breaks”,” said Adam Walkom at Permanent Wealth Partners. “That sound you currently hear is something breaking. Not content with nearly blowing up the Gilt market (and taking Liz Truss as collateral) during October, rates have kept heading higher and finally forced one small US bank to collapse with shockwaves sending out systemic risk to all parts of the financial markets.”

The bail out of Silicon Valley Bank had an impact on crypto prices, and Bitcoin jumped over 10% on Sunday night, as the US government confirmed they would step in to protect depositors of Silicon Valley Bank and Signature Bank.

Last week, three banks that were the easiest for crypto businesses to get fiat banking in the US – Silvergate, Signature, and Silicon Valley Bank – closed. “I think this could have significant implications for crypto regulations in the US and banks’ ability to integrate digital asset trading or custody,” said Marcus Sotiriou, market analyst with GlobalBlock TSXV:BLOK. “This is due to the narrative of crypto causing the problem, which certain politicians are trying to portray.”


Congress gets it wrong on Silvergate

Last Wednesday, Senator Sherrod Brown, Chair of the Senate Banking Committee, said, “As the impact of FTX’s collapse continues to ripple outward, today we are seeing what can happen when a bank is over-reliant on a risky, volatile sector like cryptocurrencies.”

In addition, Senator Warren said, “As the bank of choice for crypto, Silvergate Bank’s failure is disappointing but predictable. Now, customers must be made whole and regulators should step up against crypto risk.”

What these senators fail to realise though, is that Silvergate’s demise was not a crypto problem. Silvergate’s collapse was due to $13.3 billion of demand deposits, that depositors could withdraw in minutes, supported by only $1.4 billion of cash. As opposed to being a problem caused by digital asset trading, it was clearly due to Silvergate not having enough cash leading to the lack of capital from the bank run.

Silvergate operated on fractional reserves, like every other bank, and the loss of consumer confidence which was exacerbated by a senator letter that caused panic on social media. This undermined public trust in Silvergate, which catalysed its downfall. In this case, Silvergate was denied due process. “There is a clear agenda, in my opinion, against all crypto businesses from US politicians. We could well see companies that provide digital asset trading infrastructure move offshore because of this stance,” said Sotiriou.

Some confidence has been restored in the crypto market as USDC has bounced back to $0.987 from a low of around $0.90. In addition, a letter from US regulators said, “All depositors of this institution (Silicon Valley Bank) will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.” The same was said for Signature Bank too.

Ultimately, it is clear that continued hikes risk further destabilising the financial system, so the time in which the Fed will need to pause and then pivot could have been moved closer by the events of last week.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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