The past week delivered three major shocks to the financial and tech sectors: first, the March 8 failure of Silvergate Bank; second, the sudden, March 10 failure of Silicon Valley Bank (“SVB”); and third, the weekend collapse of Signature Bank on March 12.

Silvergate, which focused on providing banking services to the digital currency sector, announced it would liquidate after over two decades of operation. High-profile digital currency collapses such as FTX started a run on the bank so significant that, in the fourth quarter of 2022, Silvergate lost almost half its deposits while its securities tied to low interest rates were also falling in value.

In January 2023, SVB reported mark-to-market losses of $15 billion in its long-term bond portfolio. At the time, investors and depositors did not seem concerned, perhaps because of SVB’s overall size; it had $209 billion in assets and $175 billion in deposits as of December 31, 2022. Then, on March 8, SVB announced a loss of $1.8 billion from the sale of U.S. treasuries and mortgage-backed securities, and SVB’s holding company announced it was conducting a capital raise to shore up its balance sheet. That caused a run on the bank: $42 billion was withdrawn from SVB, resulting in a negative cash balance of $958 million and rendering SVB insolvent. Estimates indicate approximately 90% of SVB deposits were uninsured.

SVB represents the second largest bank failure in U.S. history and will take the Federal Deposit Insurance Corporation some time to unwind. While valuing and liquidating the U.S. treasuries and mortgage-backed securities should be relatively straightforward, valuing the equity in tech startups will be challenging, not least of all because many of them are reported to have unrealized losses themselves.

Signature Bank represents the third largest bank failure in U.S. history. Early indications are that contagion from SVB spread to Signature Bank, causing uninsured depositors to withdraw funds. Estimates indicate that, like SVB, approximately 90% of Signature Bank deposits were uninsured.

On March 12, the U.S. Department of Treasury announced it would apply the systemic risk exception for SVB and Signature Bank, a decisive action that will protect all depositors at the two banks, whether insured or uninsured. The two banks reopened Monday morning in FDIC receivership.  Losses from uninsured deposits will be recouped by a special assessment on banks.  In addition, Treasury announced that shareholders and certain debtholders will not be protected.

SVB’s failure was as sudden as it was unusual. The speed of SVB’s collapse raises questions about whether inside information was passed on to others. Also, it appears that at least one insider sold stock prior to SVB publicizing its bond sales at a loss and the attempted capital raise.  When banks fail, the primary federal regulator – in this case, the Federal Reserve Board – conducts a Material Loss Review. This process involves the agency’s Office of Inspector General, meaning any wrongdoing could result in administrative enforcement actions or criminal referrals. The FDIC’s Professional Liability Unit will also attempt “to recover funds for FDIC receiverships and to hold accountable directors, officers, and professionals who caused losses.”

SVB Failure will Bring Significant Disruption to Cryptocurrency Industry

SVB’s failure will also cause significant disruption in the cryptocurrency sector. SVB is believed to house supporting deposits for most U.S. dollar-pegged stablecoins, including Circle’s USDC coin. Reports indicated that Circle had USDC-supporting deposits of $3.3 billion at SVB, a point not lost on holders of Circle’s USDC stablecoin; in the immediate aftermath of SVB’s collapse, some outlets reported withdrawals from Circle’s USDC of over $2 billion, causing the coin – which is supposed to maintain a 1:1 value with the US Dollar – to fall to a value of under 90 cents. In fact, on Friday night, Coinbase, the crypto exchange partly responsible for the launch of the USDC, halted conversions of USDC to dollars to allow the markets to stabilize. While a reasonable reaction to the chaos, the combination of the long-term implications of USDC “de-pegging” from the $1 valuation and the subsequent freezeout by Coinbase (and other exchanges) undermines customer confidence in the market, generally, and in stablecoins specifically.

Many Unanswered Questions in Bank Collapse Aftermath

In the weeks that follow, there will be many questions, including: (1) why did SVB not have a more diversified investment strategy? (2) why did it take so long to for SVB to react to potential losses identified in its January financial reporting? (3) was there a leak of confidential bank information? (4) will stablecoins be considered stable and where will issuers deposit their reserves once SVB and Signature Bank are wound down? (5) how will this affect uninsured corporate deposits at banks beyond the credit facilities that have been announced to protect banks? Finally, (6) what additional administrative, civil, and/or criminal actions will follow? Shareholder suits against SVB have already been filed.

Harris Beach attorneys monitor the banking and digital asset legal landscape and offer guidance and strategies for compliance. If you would like more information on this topic or related matters, please reach out to Constantine P. Lizas at (202) 975-9780 or clizas@harrisbeach.com; Ross B. Hofherr at (212) 313-5482 or rhofherr@harrisbeach.com; or Adriana M. Baranello at (914) 298-3023 or abaranello@harrisbeach.com.

This alert is not a substitute for advice of counsel on specific legal issues.

Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.