Banks are holding large amounts of public bonds
Over the past day, the price of Bitcoin has seen a sharp increase from around $20,000 to $22,000. Most altcoins have also grown, crypto market capitalization has returned above the $1 trillion mark. Despite the chaos surrounding SVB’s demise and USDC losing its pegs, the price of BTC and ETH did not seem to be falling at all. It seems that investors have switched from stablecoins to BTC and ETH.
The collapse of Silicon Valley Bank (SVB) with great influence, it received great attention from the White House and also President Biden. The US Federal Deposit Insurance Corporation (FDIC), stepped in and shut down SVB on Friday as it was experiencing unprecedented withdrawals from customers. The FDIC also conducts an auction of the remaining properties of SVB on Sunday and the auction results will be available at the beginning of the week.
The Fed also announced an emergency caucus meeting on Monday. This is an emergency meeting to discuss whether the Fed will continue to raise interest rates and how it will affect banks that hold large amounts of US Treasuries.
Statistics of ETFs with bank shares also show that investors are concerned that other banks may have a similar situation to SVB.
In addition, FDIC statistics show that the amount of public bonds being held by US banks is very large. It has surged since late 2022 as interest rates soar. If there was a withdrawal crisis that would lead to these banks having to sell their bonds at a loss. According to FDIC estimates, if banks had to sell public bonds urgently, the loss could reach more than 1 trillion USD. This happens because bond prices are negatively correlated with Fed interest rates.
Although there are experts on risk management, banks still hold huge public bonds because of greed. According to the latest document dated February 21, the average bank savings interest rate is only about 0.35%/year while the yield when banks use money to buy public bonds can be up to 4.33%. The difference in profit when banks use customers’ deposits to invest in public bonds is very large.
Before raising interest rates, the Fed used to say that inflation was temporary and they did not think about raising rates. But then the Fed raised rates too quickly in just over a year. Interest rates increased from 0.25% to about 4.57% now. Before, when interest rates were low, banks used customer deposits to buy public bonds, and they did not expect that the Fed raised interest rates so quickly. It is the banks and ultimately the people who are surprised by these figures.
Before the collapse of SVB, the executives sold a lot of their shares. CEO Gregory Becker sold 11% on February 27, 2023. Michael Zucker, chief attorney also sold 19% on Feb. 5. CFO Daniel Beck then sold 32% on Feb. 27 Michelle Draper, CMO, sold 25% on Feb. 1. It seems that the heads of SVB were aware of this collapse and sold the stock. Many questioned why the Fed did not investigate this incident.
Treasury, FDIC and Fed guarantee depositors at SVB
Finally, all three agencies including the Ministry of Finance, the Fed and the FDIC have said that they will guarantee depositors at SVB and Signature Bank by these agencies.
In it, the FDIC will be used to pay depositors, many of whom are uninsured due to the $250,000 limit on secured deposits. Shareholders and some unsecured creditors will not be protected and will lose all of their investments.
The Fed also said it is creating a new bank term funding program to protect institutions affected by market turmoil caused by the SVB’s failure. The Fed facility will provide loans for up to one year to banks, savings associations, credit unions, and other institutions. Banks that use this policy will be required to mortgage high-quality collateral such as treasury bonds, agency debt, and mortgage-backed securities.
With that, the Treasury Department is providing up to $25 billion from its Exchange Stabilization Fund as a measure to cover any potential losses from the funding program. This fund is used to reserve for the worse case that may occur, if too many banks are affected by SVB.
Update on Grayscale’s lawsuit with the SEC
Last year, Grayscale sued the SEC after the regulator rejected an application to convert Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin (BTC) exchange-traded fund (ETF).
In its first hearing in the District of Columbia Court of Appeals last week, Grayscale primarily argued that the SEC was inconsistent in applying its standards after approving the Bitcoin Future ETF while rejecting the Bitcoin spot ETF.
The SEC countered by saying that unlike its futures counterpart, a spot Bitcoin ETF is not regulated and thus the regulator cannot be certain that there is no fraud or manipulation in the market. basic.
The judge in the case between the SEC and Grayscale over the Bitcoin spot ETF was not satisfied with the SEC’s argument as to why the Bitcoin ETF spot should not be passed. The SEC says that even though the spot and futures markets are 99.99% correlated, the SEC still thinks spot risk is higher and doesn’t explain why. Because ordinary people will think futures risk is higher. And proving that the Bitcoin spot ETF will not be manipulated is not the responsibility of the Grayscale company. As a result, the judge said, the SEC didn’t really give a satisfactory answer to its arguments. The judge’s answer shows that the upper hand is in favor of Grayscale, while the SEC has recently encountered many legal obstacles with crypto.
Companies affected by SVB
The collapse of SVB not only affects the macroeconomy, the Fed, the Ministry of Finance, etc., but also greatly affects the crypto market. Many crypto companies are also depositing or investing in SVB, this collapse also makes them suffer. Here are some affected companies
On Sunday night, Ripple CEO Brad Garlinghouse tweeted that Ripple “has some contact with SVB – it is a banking partner and has some of our cash balance.”
Even so, Garlinghouse asserts that Ripple expects “no disruption to our day-to-day business” and that the company “remains in a sound financial position.”
BlockFi, filed for bankruptcy in November following the collapse of FTX. According to the latest bankruptcy documents, they have $227 million in funds held at SVB. These funds are not insured by the FDIC because they are in a money market mutual fund, which in itself could constitute a violation of bankruptcy law.
Circle said in a statement Friday that SVB is one of six banks it relies on to manage USDC’s cash reserves. The number stuck at this bank is about $3.3 billion, but they claim USDC will be able to continue operating normally.
Crypto-focused venture capital firm Pantera may have exposure to SVB, but it did not specifically share the amount of money it holds at the bank.
The Avalanche Foundation, which supports the Avalanche blockchain, announced Friday night that it has more than $1.6 million stuck at SVB.
Yuga Labs, the $4 billion company behind the NFT Bored Ape Yacht Club collection (among other projects), gets exposure to SVB. Yuga co-founder Greg Solano said Friday that the company has “super limited exposure” to SVB that hasn’t confirmed exactly how much.
Mr. Solano said the money did not affect their business or plans.
Proof may have been hit harder and they claim to have cash stored at SVB. But they also assert that the potential loss will not affect the safety of customer assets or Proof’s route.
Nova Labs, the startup behind the decentralized network and internet provider Helium, has said that there is an amount at SVB but did not disclose a specific number.
In addition, a number of other crypto companies have announced that they are not related to SVB such as Crypto.com, Binance, Paxos, Kraken, Dapper Labs, Tether, Solana, Polygon,…
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