How did three major banks fail?

We have witnessed the collapse of three major banks: Silvergate, Silicon Valley, and Signature. These three banks had been some of the most successful in the world but recently faced a sudden and unexpected downfall.

It started with Silvergate, which had been providing services to large corporate clients but ran into trouble due to mismanagement of funds. Silicon Valley followed shortly after, facing a similar fate due to poor investments and a lack of oversight.

Lastly, Signature encountered some major accounting issues caused by consumers withdrawing their money from the bank. This caused a ripple effect that led to the closure of these three banks.

Being some of the major banks in the USA, these failures have caused a lot of concern and worry. Let’s find out what caused these banks to fail in detail and what are the consequences of their collapse.

The closure of major banks has caused a ripple effect on the global economy, affecting not only the financial sector but also other industries and ordinary people. The economic fallout from these bank failures has been significant, as businesses and consumers have lost access to credit and financial services. Many people have lost their jobs, while others have had to tighten their belts due to the economic downturn.

Why did the Silvergate fail?

When it comes to crypto lending and trading services, Silvergate was one of the biggest banks in the USA. The main reason behind its downfall was the downfall of FTX. Back in November 2022, FTX’s collapse took place due to FTX investors filing lawsuits against their own company.

This lawsuit created a ripple effect that caused Silvergate to suffer huge losses. A civil suit said that FTX lied and tricked people. The lawsuit also said that FTX took customer money and put it in different places without permission.

This was a case of money laundering and Silvergate was dragged into this. And since investors put their money into Silvergate, investors started to withdraw in huge amounts. 

Only in November 2022, investors withdrew over $8 billion from Silvergate, which caused the bank to collapse.

The bank lost $718 million from selling debt. Its latest report showed it lost $1 billion in the last three months of 2022 and almost $950 million for the whole year. This was different from 2021 when it made a profit of $76 million.

The loss is significantly higher and therefore, Silvergate could not sustain its operations. Because of these major incidents, Silvergate Bank started to collapse and lost its customers.

Why did Silicon Valley Bank fail?

The biggest technology start-up bank, Silicon Valley Bank (SVB) didn’t go according to plan. SVB was one of the biggest names when it came to lending money to technology start-ups, but it had trouble staying afloat.

During the pandemic, technology start-ups saw a huge demand for their services and made a lot of profit.

As a result, these start-ups started to deposit the money they earned at SVB. Later, SVB invested most of the money in Government bonds as they are considered one of the safest and most secure investments.

However, when the government started to raise interest rates to fight against inflation, the value of the bonds that SVB held dropped its prices significantly. When the customers found out about the situation, they started to make huge withdrawals from their accounts.

As a result, SVB had to sell the bonds at a loss to meet the customer’s needs and eventually, it went bankrupt. It was the only solution to make sure the customers got their money back. However, it led to huge losses and SVB collapsed in the end.

This also caused the share price of the company to drop significantly (65%), which caused an even bigger loss for SVB. 

This created a domino effect and made other depositors withdraw their money from the bank. It caused a huge liquidity crisis for the bank and it led to its collapse.

Why did the Signature Bank collapse?

Signature Bank was a bank that was protected by the FDIC. It worked with companies in New York and had clients who owned businesses. They helped law offices, real estate buyers, and companies that used cryptocurrency.

S&P Global said that – Signature Bank was the 19th biggest bank in the United States. In December 2022, it had $110.36 billion in assets and $88.59 billion in deposits.

Right after the downfall of the Silicon Valley Bank, its rival Signature Bank was also affected. The reason why Signature Bank collapsed was due to the mismanagement of funds and finances. Signature Bank closed on March 12, 2023.

This happened after lots of people took out their money from the bank because SVB caused a domino effect.

Depositors lost confidence in these banks and started to withdraw money in very large amounts. Too many withdrawals caused the bank to lack funds and eventually go bankrupt. Even the investors had little to no confidence in the bank and felt that their money was going to waste.

This led to the bank’s downfall, just like the Silicon Valley Bank and the Silvergate Bank.

What are the consequences of the collapse of these three banks?

The collapse of these three major banks has had a huge impact on the financial industry. Many people have lost money, jobs have been cut and people are now questioning the stability of banks in general.

This can lead to further instability in the market and make people reluctant to invest their money in any bank or company.

For example, the Silicon Valley Bank used to be the biggest lender for tech start-ups but its collapse has led to a decrease in investments. This can lead to further stagnation of the tech industry and make it more difficult for new companies to get off the ground.

The failure of these three banks could also cause a liquidity crisis in the global financial markets and make it harder for people to get access to loans. Banks will now be more hesitant to lend money out and this can lead to further economic issues.

To achieve sustained economic growth and development, it’s important to recognize that the banking industry plays a crucial role. Banks offer essential financial services, including credit and loans, that enable businesses to invest, expand, and create jobs. Without a robust banking sector, it becomes difficult to support economic growth and development. Therefore, it’s vital to acknowledge the integral role banks play in promoting economic expansion.

Finally, it could result in more strict regulations being put in place to ensure that banks are properly managed and do not fail in the future. This can lead to less freedom for banks, making it harder for them to offer competitive services.

Conclusion

Going forward, it is wise to monitor and regulate banks vigilantly to ensure their stability and resilience. This calls for a reiterative effort among governing authorities, regulators, and the banking industry to develop better oversight mechanisms and ensure banks are held accountable for their actions. The implementation of appropriate policies and regulations can establish a transparent, responsible banking sector, capable of boosting economic growth and development.

Shutting down these major banks has had a huge impact on the global economy and it will take time to fully recover. As of now, people are hoping for more transparency and stricter regulations to ensure that these major banks do not fail again. These incidents prove that banks need to be carefully monitored so that such issues can be avoided in the future. Thanks for reading!