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  • K Kim and M Bacina

SVB steps back from the valley edge with US Govt bailout

Courtesy of Dalle 2 (lightly edited)

The collapse of Silicon Valley Bank (SVB), the self-proclaimed 'financial partner of the innovation economy' sent nearly half of all venture-backed technology and life-science startups in the United States and 2500 venture capital firms into panic on Friday.

SVB’s liquidity crisis caused by macroeconomic factors and insufficient risk management led to a bank run on their deposits. SVB’s stock plunged throughout Thursday and after crashing by another 69%, SVB was officially shut down by mid Friday.

On 10 March, the Federal Deposit Insurance Corporation (FDIC) announced that it would take over the SVB. The FDIC guarantees return to customers with deposits of up to USD$250,000 and ordinarily customers would receive a "certificate" for the balance of any deposit, with that certificate tradable and otherwise redeemed for the balance (or less than the balance if the bank's assets are not sufficient). In a bold decision designed to stop contagion, the US government announced Sunday night Washington time a decision to guarantee all deposits including those uninsured:

Depositors will have access to all of their money starting Monday, March 13…No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

The US government announced that the emergency measures will be funded by selling off SVB’s assets, differentiating its approach from the congressionally approved bailout of the US financial system authorities during the 2008 financial crisis. The regulators are also closely monitoring other banks that may be facing similar issues.

SVB’s collapse marks the largest bank failure since the 2008 financial crisis and one of the biggest in US history. Widespread panic had threatened the banking industry, and concerns of financial contagion spread as investors looked to reduce their risk in smaller banks. Bank runs on smaller banks have already potentially started, with corporate customers making mass withdrawals from regional banks.

Meanwhile, larger banks including JPMorgan, Wells Fargo and Citigroup have remained relatively unaffected. The former chair of the FDIC confirmed:

I don't think that this is an issue for the big banks - that's the good news, they're diversified.

All eyes are on the banks and markets to see if the bold moves by the US Government will stop the contagion. It appears that the financial market contagion which impacted Circle's stablecoin USDC has now ended with the stablecoin returning to its peg.


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