Last week has proven to be dramatic, with both foreseen and unforeseen events. Powell’s statements before Congress sent expected rates shooting up. Silicon Valley Bank’s (SVB) subsequent collapse sent rates markets the other way and exacerbated the selloff in crypto and equity markets. The markets are pricing in no further tightening on the next FOMC meeting in the aftermath of these bank collapses. Along with Silvergate and Signature, there have been three significant bank collapses in a week. We can see a pattern emerging from these collapses:
- Institutions are holding onto a large amount of losses from a bad year amidst collapsing equity/crypto prices and rapidly rising rates
- A liquidity crunch follows from realizing these losses, or from a loss of public confidence related to these losses leading to a run
- Institutions are unable to recapitalize due to the overall liquidity shortage on markets even if they are sound in the longer term
Broadly, this is similar to collapses that have already occurred within the cryptosphere. In the case of SVB, the FDIC was forced to step in to make depositors whole, above the 250,000 USD per account as usual. This, along with HSBC’s acquisition of SVB UK, has halted contagion fears for now and is evidence that the post 2008 system is more resilient and responsive. However, systemic stresses are not abating unless liquidity becomes more available. With crypto markets being less regulated than traditional markets and less likely to invite government support, the potential downside ahead remains substantial should anything break. SVB’s collapse already resulted in a visible red warning in the form of USDC’s depegging. It is again a reminder that mechanisms that relate different parts of the financial system, decentralized or otherwise, both propagate stresses and can be broken. The road ahead is uncertain and it is worth reevaluating assumptions that can be taken for granted in more ordinary times.
SVB’s collapse also offers a final lesson. HSBC has been able to acquire SVB UK for a single pound by taking on potential liabilities, and is able to do so because of their ability to absorb the remaining risk. SVB was a victim of both hard times and markets that have decided to shoot first and ask questions later. This acquisition, impossible under normal times, represents a massive opportunity to expand HSBC’s network in tech and their footprint in the US. Should we see another major financial crisis develop, those who protect their capital and have remaining liquidity will be able to snap up assets at incredible discounts. Investors may be well advised to seriously consider this as a model rather than reaching for a falling knife. Caution now is space for greed later.