In-depth Analysis of FTX's Balance Sheet: A Textbook Case of a Bank Run

Written by: Degg_GlobalMacroFin

1. The Financial Times has just disclosed what is said to be FTX's last-minute balance sheet, which appears to be SBF showcasing FTX's financial situation to potential investors (Figure 1).

This balance sheet not only shows what FTX looked like in the last moments before Chapter 11 bankruptcy but also illustrates how FTX suddenly fell into an abyss of no return since last weekend.

It can be said that this balance sheet is a perfect "banking crisis" textbook.

2. Let's first look at FTX's balance sheet situation before the run on the bank (last Saturday).

At that time, FTX had approximately $24 billion in total assets on the asset side.

• Among them, there were about $6 billion in liquid assets, including various stablecoins, deposits in different currencies, and Robinhood stocks.

• Additionally, it held about $15 billion in various crypto assets, marked by SBF as "less liquid," including $6 billion of its own issued FTT, $2.2 billion in SOL, and $5.4 billion in SRM.

• Finally, there were $3.2 billion in illiquid assets, mainly various venture capital investments. Some speculate that FTX held so many assets related to SBF (SOL, FTT, SRM) because SBF used customer funds placed in FTX to control related assets. Others speculate that FTX used tokens like FTT, SOL, and SRM as collateral to provide loans to Alameda, and these tokens on the balance sheet actually represent a consolidated statement of FTX and Alameda (SBF indicated that FTX provided about $8 billion in loans to Alameda in this balance sheet).

On the liability side, last Saturday, FTX had about $14 billion in liabilities, including at least $5 billion in USD or USD stablecoin liabilities, as well as a large amount of BTC and ETH liabilities. At this time, FTX's net capital (total assets minus liabilities) was about $10 billion.

In other words, before last Saturday, FTX's leverage ratio was only 1.4 times, and SBF was indeed a billionaire at that time (Figure 2).

3. Now let's look at FTX's liquidity situation last Saturday.

SBF estimated that FTX's average daily fund withdrawals were $250 million. Therefore, even without new funds coming in, SBF expected that its $6 billion in liquid assets could withstand about 24 days of withdrawal demand (similar to the "liquidity coverage ratio" concept in traditional banking), which would give FTX ample time to liquidate various tokens held or seek funds from elsewhere.

4. However, the run that started on Sunday exceeded SBF's expectations.

SBF stated in the document that on Sunday (November 6), FTX faced withdrawal demands 25 times higher than usual, with net outflows reaching $5 billion in just a few days, including at least 20,000 BTC and a large amount of stablecoins.

The result of the run is: The total amount of FTX's liquid assets dropped from $6 billion to only $1 billion (it is unclear whether the $5 billion flowed out on Sunday or accumulated from Sunday to Wednesday).

At this point, FTX's $1 billion liquidity reserve faced a daily outflow pressure of $5 billion (which, of course, could not continue at that level), and the coverage ratio dropped from 24 times ($6 billion / $250 million) to 0.2 times ($1 billion / $5 billion). In other words, if it did not suspend withdrawals, it could only survive for a few hours.

5. Accompanying the evaporation of liquidity was the sharp decline in the prices of FTX-related assets.

It is unclear how many assets FTX itself sold in the secondary market, but the prices of FTT, SRM, and SOL have dropped approximately 90%, 60%, and 60%, respectively, since last week. This led to a significant reduction of 2/3 in the total market value of FTX's less liquid assets, from $15 billion to $5 billion.

SBF did not impair the non-liquid assets he held, but most of these assets are related to venture capital in the crypto field, making market valuation very difficult and likely already significantly reduced.

Therefore, after experiencing a run and asset impairment, FTX's balance sheet situation before bankruptcy was: only $1 billion in liquid assets left on the asset side, $5 billion in tokens, and $3 billion in book value of non-liquid assets that likely have very low actual value, while the liability side still had about $9 billion in liabilities, of which $5 billion was USD-denominated.

In other words, at this point, FTX was not just facing a liquidity crisis but a complete solvency crisis.

It was already insolvent (Figure 3).

6. FTX's collapse in just a few days is a textbook case of a bank run, exhibiting almost all characteristics of a bank run, especially for investment banks (dealer banks):

(1) It implemented a large amount of risk transformation and liquidity transformation, using customer funds for high-risk and low-liquidity asset investments.

(2) The estimation of withdrawal pressure was completely inadequate, resulting in what seemed to be ample liquidity reserves being exhausted in just a day or two.

It should be noted that the run in the crypto asset field occurs entirely on-chain, thus the pressure far exceeds that of traditional banking systems.

In traditional commercial banking, a net outflow of 10% of deposits in a month is already a serious crisis (Figure 4).

For investment banks, Lehman Brothers saw its liquidity reserves drop by $40 billion in the week before its bankruptcy, accounting for about 8% of its total assets.

In the case of FTX, the daily net outflow of funds from a crypto exchange could reach as much as 1/3 of its total liabilities.

This is an extremely terrifying liquidity pressure, and it can be said that no financial institution that employs partial liquidity reserves can escape, let alone FTX, which had an aggressive style and was even involved in a Ponzi scheme.

(3) The asset side was valued at market value, making it very easy to fall into a death spiral of run-sale-asset price decline-equity decline-increased run. What is more brutal about FTX is that it held a large amount of its own stock, equivalent to a bank buying its own stock and injecting capital into itself.
(4) News spread extremely quickly, combined with very fragile market sentiment, accelerating the giant's collapse.

7. SBF had a good summary in this document.

There were many things I wish I could do differently than I did but the largest are presented by these two things: the poorly labeled internal bank-related account, and the size of customer withdrawals during a run on the bank.

Translated, it means: The two things I regret the most are: I should not have dealt roughly with Alameda in credit transactions, and I should not have underestimated the liquidity pressure of a bank run.

8. The $20 billion bank run case of FTX is worth writing into all monetary banking textbooks.