The failure of Silicon Valley Bank can be directly related to traditional finance. The crypto industry is not responsible for the crypto-friendly bank’s failure.
The traditional banking market works on the concept that depositors will never feel the need to withdraw all of their funds from the bank at the same time. However, when this assumption fails, banks are hit by asset-liability mismatches, and this always has disastrous consequences for traditional financial institutions.
Silicon Valley Bank, which was one of the biggest in the United States supporting venture capital firms, has recently collapsed because of a liquidity crisis. The crisis has affected the whole crypto market and related startups.
The collapse of SVB tells us a lot about the struggles of traditional banks, and all these can quickly weigh the banks down anytime. Whenever the assets and liabilities of a bank are not properly aligned, this causes huge financial losses for the bank.
Failure to manage the increasing interest rate can hit a bank’s profitability. In the SVB’s case, a run on deposits caused a significant outflow of funds. This, coupled with the asset-liability mismatch, caused the collapse of SVB.
Looking at the stats, it can be deduced that SVB mainly focused on NIM and NII while neglecting the risk of EVE. This exposed the bank’s sudden changes in interest rate, as well as EVE risks.
SVBs failure to hedge interest rate risk was a major factor behind its liquidity issues. As the interest rates increased, the bank’s earnings and EVE also declined. The issue of lack of deposits arises from the bank’s highly volatile investments. This decision was taken by SVB’s management and has proven to be detrimental to the bank.
If it wasn’t for the FED’s lack of regulatory oversight, SVB and other collapsed banks like Signature would’ve been in a better position to handle financial shocks. The absence of mandatory regulatory oversight by the FED caused the SVB to collapse.
It would be unfair to blame the crypto industry for the collapse of SVB, as the bank had some crypto projects in its portfolio, just like any other bank. Blaming the crypto industry would also be unfair because SVB’s collapse was caused by the lack of regulatory oversight by the authorities and because of the poor financial decisions made by the bank’s management.
Risk Management Policies
From now on, every bank should regularly follow strict guidelines for risk management. Banks can’t only rely on FDIC’s deposit insurance. While the crypto market may have been a part of the ongoing failures, the industry isn’t directly involved in the collapse of any bank.
So, rather than blaming the crypto industry, banks and regulatory bodies should focus on implementing proper risk management and regulations.