The 48 hours of the Silicon Valley Bank run: multiple crypto venture capital firms and startups were affected, and stablecoins like USDC depegged

Author: Xiyou, ChainCatcher

Silicon Valley Bank has also collapsed.

Following the announcement of liquidation by the crypto-friendly bank Silvergate Bank, on March 10, Silicon Valley Bank (SVB) was shut down by regulators, leaving users' assets on the platform facing an uncertain withdrawal timeline.

Within a week, two banks faced a run due to liquidity issues, with some attributing this to the impact of the Federal Reserve's interest rate hikes, while others pointed to the duration mismatch of bond assets deployed by the banks…

Silicon Valley Bank rapidly collapsed after disclosing significant losses from bond sales and plans to raise new funds, leading to a sharp drop in its stock price. The panic among users triggered a run that ended the operations of this bank, which had been in existence for over 40 years, within 48 hours.

The impact of Silicon Valley Bank has already spread to the crypto market, with the most affected being the issuer of the US dollar stablecoin USDC, Circle, which has $3.3 billion in reserve funds at Silicon Valley Bank. The price of USDC was affected by panic, dropping to as low as $0.86. According to Coingecko, USDC is currently priced around $0.90, with a daily decline of 10%, and a market cap reduced to $36.9 billion.

The Dramatic 48 Hours of Silicon Valley Bank

Within 48 hours, the panic-induced run forced Silicon Valley Bank (SVB), which had been operating for over 40 years, to announce its closure.

On the evening of March 10, Beijing time, the California Department of Financial Protection and Innovation announced the closure of Silicon Valley Bank and designated the FDIC (Federal Deposit Insurance Corporation) as the receiver.

The FDIC stated in its announcement that the main office and branches of Silicon Valley Bank would reopen on Monday, at which time insured depositors could access relevant departments to handle their business. Insured bank accounts are protected up to $250,000, and whether depositors with more than $250,000 can recover all their funds will depend on the amount obtained by regulators from the sale of Silicon Valley's assets.

As of December 31, 2022, Silicon Valley Bank had total assets of approximately $209 billion (comparable to leading city commercial banks in China) and total deposits of about $175.4 billion. The amount of insured deposits and the number of accounts at Silicon Valley Bank have yet to be determined.

The liquidity crisis at Silicon Valley Bank can be traced back to the performance report for the first quarter of 2023 disclosed by SVB on March 8. The report revealed that SVB had sold $21 billion of its available-for-sale (AFS) bond portfolio, with a yield of 1.79% on 3.6-year bonds. It was estimated that this sale would result in an after-tax loss of $1.8 billion.

Additionally, Silicon Valley Bank planned to raise $2.25 billion through the sale of common and preferred stock, among other forms of equity, with General Atlantic committing to invest $500 million.

"This move is aimed at better adjusting SVB's asset structure, planning to increase cash reserves. The funds obtained from the bond sale will be reinvested, taking advantage of rising short-term interest rates to purchase short-term bonds, rebuild the AFS investment portfolio, and enhance profitability," Silicon Valley Bank explained in a letter to stakeholders.

However, investors were not convinced by Silicon Valley Bank's strategic actions to adjust its balance sheet. This operation was viewed by depositors as a panic-driven asset sell-off and a severe dilution of equity, raising concerns about the Federal Reserve's interest rate hikes hindering banks' ability to raise funds, which led to a sharp decline in Silicon Valley Bank's stock price. During trading on March 9, Silicon Valley Bank's stock plummeted by 60.41%, marking the largest drop since 1998.

Subsequently, due to concerns about Silicon Valley Bank's financial stability, several well-known venture capital firms publicly announced plans to withdraw funds from the bank. For instance, the Founders Fund, co-founded by "Silicon Valley Godfather" Peter Thiel, advised some portfolio companies to pull funds from Silicon Valley Bank; Garry Tan, president and CEO of the renowned U.S. startup incubator Y Combinator, warned its portfolio startups that the solvency risk of Silicon Valley Bank was real and that they needed to consider limiting their exposure; Union Square Ventures advised portfolio companies to "keep only minimal funds in Silicon Valley Bank's cash accounts," among others.

Before the U.S. stock market opened on March 10, regulators announced a trading halt for Silicon Valley Bank.

According to regulatory documents, on March 10 alone, investors and depositors attempted to withdraw $42 billion from Silicon Valley Bank, triggering a run.

Interest Rate Hikes Trigger Liquidity Crisis in the Banking Sector

Data shows that Silicon Valley Bank was established in California in 1983 and went public on NASDAQ in 1988, headquartered in Santa Clara, California. The bank primarily served technology companies, providing services including commercial banking, venture capital, wealth planning, and investment banking.

Despite operating for over 40 years, it took Silicon Valley Bank only 48 hours from the revelation of its problems to the announcement of its closure.

Knowing that selling the securities portfolio could lead to an $1.8 billion loss, why did Silicon Valley Bank insist on selling its securities? Can an $1.8 billion loss lead to a bank's collapse?

Behind this is the dual dilemma of "bond impairment" and "deposit outflow."

The securities available for sale by Silicon Valley Bank were primarily composed of U.S. Treasury bonds and mortgage-backed securities. However, due to the Federal Reserve's aggressive interest rate hikes, the related bonds depreciated significantly, causing Silicon Valley Bank to suffer from bond impairment.

At the same time, the deposits of Silicon Valley Bank's main clients, startup technology companies, rapidly dwindled. It is reported that nearly half of the venture capital-backed technology and life sciences startups in the U.S. have established banking relationships with Silicon Valley Bank. Against the backdrop of continuous interest rate hikes by the Federal Reserve, a downturn in the economic environment, a sluggish U.S. IPO market, and significant survival pressure on U.S. tech companies, many high-tech startups were forced to continuously withdraw large amounts of deposits from Silicon Valley Bank to support their business operations, exacerbating the bank's deposit outflow.

Silicon Valley Bank is not the first bank to collapse. On March 8, Silvergate Bank, known for being crypto-friendly, announced it would cease operations and voluntarily liquidate its subsidiary Silvergate Bank, which served the cryptocurrency industry. This bank was established in 1986 and is controlled by Silvergate Capital Corp.

Perhaps the collapse of Silvergate Bank created a trust crisis among users towards banks, becoming the first domino to fall. When Silicon Valley Bank was revealed to be facing similar issues due to securities sales losses, it quickly triggered panic selling in the financial sector. It is reported that on that day, the four largest banks in the U.S. lost $47 billion in market value. The simultaneous collapse of these two banks further intensified the spread of panic.

In fact, both Silvergate Bank and Silicon Valley Bank faced similar issues, namely a liquidity crisis. Many users attribute this predicament to the Federal Reserve's interest rate hikes.

This is mainly because interest rate hikes lead to rising rates, making users more willing to keep their money in banks to earn interest rather than engage in other economic activities, suppressing economic demand. This poses significant pressure on financial institutions with high debt levels, as they have to bear substantial interest costs, which also affects the prices and rates of long-term U.S. Treasury bonds.

For example, if Silicon Valley Bank bought a 3-year Treasury bond in 2021 when rates were low, assuming a total yield of 3% by 2025, the original $100 would mature to $103. If held to maturity, Silicon Valley Bank could still receive $103 in 2024 (relative to today, it just earns slightly less interest). After the interest rate hikes, the rate for a one-year Treasury bond is now 5%. If the bank sells the bond before maturity, it may have to sell it at a discount, potentially selling the originally purchased $100 bond for around $92, resulting in an 8% loss. What was initially just a lower yield has now turned into a real loss.

Additionally, the bonds they traded were long-term Treasury bonds, which easily caused duration mismatch. When banks are forced to sell assets at a loss during a run to meet depositors' redemption requests, duration mismatch occurs. Selling enough assets at sufficiently high discounts leads to losses, and these losses, due to the run, further exacerbate the losses.

Bank Collapses Affect the Crypto Market

Unexpectedly, the storm from Silicon Valley Bank quickly spread to the crypto market, affecting investment institutions, crypto lending platforms, and stablecoins.

Data from the U.S. SEC's ADV filings shows that several institutions' private equity funds had funds deposited at Silicon Valley Bank, including Sequoia Capital, a16z, Paradigm, Pantera, USV, and Gao Rong Capital, among others. This includes $2.85 billion related to a16z funds, $1.72 billion related to Paradigm funds, and $560 million related to Pantera Capital funds. The crypto lending platform BlockFi held $227 million in uninsured funds at Silicon Valley Bank.

Today, the most affected is the stablecoin USDC issued by Circle.

USDC, pegged to the U.S. dollar, is currently the second-largest dollar stablecoin by market cap, with a circulating supply of $43 billion, reportedly fully backed by government bonds and cash-like assets.

On March 11, Circle first posted on social media that Silicon Valley Bank was one of six banking partners used to manage about 25% of USDC's cash reserves. It later confirmed that the company had initiated a wire transfer request to move balances from Silicon Valley Bank on Thursday, but it has not yet been processed, with $3.3 billion of its approximately $40 billion USDC reserves still remaining at Silicon Valley Bank.

After this news was released, the price of USDC depegged from the dollar, quickly dropping to $0.938, a decline of over 6%.

The depegging of USDC quickly triggered a series of chain reactions.

Users, in a state of panic, rushed to exchange USDC for other currencies, including market makers and institutions like IOSG, Jump, Wintermute, and FalconX, which all took emergency hedging measures. To stabilize the price, Circle began to destroy USDC in large quantities. According to monitoring data from Shield, Circle destroyed 2.7 billion USDC in the past 24 hours, with 70% of that occurring in the past 8 hours.

Subsequently, Coinbase announced it would temporarily suspend USDC:USD conversions during the weekend bank closure; Binance announced it had suspended the automatic conversion of USDC to BUSD; and the crypto and stock trading app Robinhood announced it would suspend trading and deposits of USDC.

The pressure then shifted on-chain, with the Curve 3pool (USDC/USDT/DAI) liquidity pool reaching a daily trading volume of $4.5 billion, 12.85 times the pool's TVL (approximately $350 million). Moreover, the proportion of USDC in this pool was severely skewed, with USDC accounting for over 85% as of the time of writing.

Additionally, the depegging of USDC further caused DAI to depeg. The algorithmic stablecoin FRAX, which has about 80% of its reserves in USDC, has now depegged to around $0.92, while other stablecoins like agEUR and TOR also have portions of USDC as reserves.

If USDC further depegs, it will inevitably trigger more severe on-chain liquidations. According to analysis from Shen Yu, there are two critical nodes for USDC: first, there are $3 billion of USDC collateralized in MKR on-chain to mint DAI, and once liquidation is triggered, the losses will be substantial; second, with the bank reopening on Monday, attention needs to be paid to the run situation. Binance currently holds over $3 billion in USDC, and the dynamics of exchanges and market makers need to be monitored.

Now, Coingecko shows that the price of USDC is $0.90, down about 10%, with a market cap reduced to $36.9 billion. Falling below the $40 billion mark—clearly, the market reaction indicates concerns about Circle's reserve situation.

However, some KOLs believe that the collapse of Silicon Valley Bank will not have a significant impact on Circle, as the $3.3 billion in funds is manageable, and USDC will ultimately regain its peg. The FDIC has not yet liquidated SVB's assets, but how much can ultimately be returned to Circle remains to be seen.

It is important to note that the impact of Silicon Valley Bank's closure is not yet over, and panic is still spreading.