Khan Capital | March 2023
Key Takeaways
- Three US banks (Silvergate, SVB, Signature) failed within five days in March 2023, representing over $320 billion in combined assets and triggering the most acute banking panic since 2008.
- The Federal Reserve created the Bank Term Funding Program, allowing banks to borrow against bond portfolios at par value, effectively addressing over $600 billion in unrealised losses across the banking system.
- The crypto-banking nexus proved a critical vulnerability: the FDIC found Signature’s failure was caused by “illiquidity precipitated by contagion effects” combined with poor management and 90% uninsured deposit concentration.
- Social media-accelerated bank runs compressed the timeline from days to hours, with SVB losing $42 billion in deposits in a single day, fundamentally challenging traditional regulatory response models.
- The crisis revealed the structural tension between the Fed’s inflation-fighting rate hikes and their consequences for bank balance sheets, establishing financial stability as a binding constraint on future monetary policy.
Three US banks failed in five days. Silvergate Bank announced voluntary liquidation on 8 March. Silicon Valley Bank was seized by the FDIC on 10 March. Signature Bank was shut down by New York regulators on 12 March. Together, they represented over $320 billion in assets and triggered the most acute banking panic in the United States since the 2008 financial crisis. The Federal Reserve responded by creating the Bank Term Funding Program (BTFP), Treasury invoked the systemic risk exception to guarantee all deposits, and the entire regional banking complex was forced into a rapid and painful repricing of risk.
What makes this crisis distinctive is the speed with which it developed and the specific nexus of crypto industry exposure, interest rate risk, and social media-accelerated bank runs that drove it.
Silvergate: The Crypto Winter’s First Banking Casualty
Silvergate Bank, a California-based institution with approximately $11.4 billion in assets, had reinvented itself as the banking partner of choice for the cryptocurrency industry. At its peak, Silvergate held over $14 billion in digital asset customer deposits.
The bank’s undoing began with the collapse of FTX in November 2022. As the crypto winter deepened, Silvergate experienced massive deposit outflows. In Q4 2022 alone, the bank lost approximately $8 billion in deposits, a 68% decline. To meet withdrawals, Silvergate was forced to sell securities at steep losses, resulting in a net earnings loss of $1 billion.
On 8 March 2023, Silvergate announced it would voluntarily wind down operations and liquidate. The timing proved catastrophic: the announcement landed at 4:30 p.m. ET, in the same half hour that SVB disclosed its own capital-raising plans.
Signature Bank: Contagion Claims Its Next Victim
Signature Bank, a New York-based institution with $110 billion in assets and $88.6 billion in deposits, had emerged as crypto’s other major banking partner alongside Silvergate. Its Signet payment platform enabled instant 24/7 fiat transfers for crypto companies.
When SVB collapsed on Friday 10 March, the contagion fear materialised with shocking speed. The FDIC’s post-mortem concluded that “the primary cause of Signature’s failure was illiquidity precipitated by contagion effects,” while identifying poor management and an overreliance on uninsured deposits (approximately 90% of total deposits) as root causes. The bank lost 20% of its total deposits in a matter of hours on 10 March.
On Sunday evening, 12 March, the New York State Department of Financial Services seized Signature Bank. In a joint statement, Treasury, the Fed, and the FDIC announced a systemic risk exception guaranteeing all depositors would be made whole.
The BTFP: The Fed’s Emergency Response
On 12 March, the Federal Reserve announced the creation of the Bank Term Funding Program, offering loans of up to one year to eligible depository institutions. The critical innovation was that collateral would be valued at par rather than market value, meaning banks could borrow against the full face value of their Treasury and agency securities portfolios even though those portfolios had suffered enormous unrealised losses.
The total unrealised losses in the US banking system’s bond portfolios exceeded $600 billion at the time. By 16 March, borrowing at the Fed’s discount window had reached approximately $150 billion, more than 12 times the previous level. BTFP lending eventually peaked at $161.5 billion before the programme ceased offering new loans in March 2024.
What the Market Is Misunderstanding
This was not a 2008-style solvency crisis. The banks that failed were not brought down by toxic mortgage-backed securities. They failed because of a mismatch between the duration of their assets (long-term bonds) and the stability of their liabilities (flighty uninsured deposits). The underlying assets, US Treasuries and agency bonds, are credit-risk-free; they simply lost market value because interest rates rose.
The crypto-banking nexus was a vulnerability, not the cause. The crypto connection accelerated and concentrated the runs, but any bank with a similar asset-liability mismatch and a concentrated, uninsured deposit base was vulnerable.
Social media changed the speed of bank runs. The SVB run saw $42 billion withdrawn in a single day, a velocity of deposit flight that was historically unprecedented. Venture capitalists used Twitter, Slack channels, and group chats to coordinate withdrawals simultaneously.
The BTFP effectively removed the deposit insurance limit for systemically important failures. By guaranteeing all deposits regardless of the $250,000 FDIC insurance cap, regulators created an implicit expectation that would influence depositor behaviour going forward.
Structural Interpretation: The Price of Rapid Rate Hikes
The March 2023 banking crisis is, at its core, a consequence of the Federal Reserve’s most aggressive tightening cycle in 40 years. By raising the federal funds rate from near zero to 4.5-4.75% in less than 12 months, the Fed imposed enormous mark-to-market losses on institutions holding long-duration fixed-income assets purchased during the low-rate era. The crisis also reveals a structural tension in the Fed’s dual role as both monetary authority and bank supervisor.
Implications for Investors
Regional bank equities face a structural de-rating. The crisis has permanently raised the risk premium applied to banks with concentrated deposit bases and significant unrealised bond portfolio losses.
Commercial real estate lending will tighten. Regional and community banks are the primary lenders to the commercial real estate sector. The crisis-driven contraction in their balance sheets will reduce available financing.
The crypto industry’s banking access has been severely curtailed. With Silvergate and Signature both gone, the US crypto ecosystem has lost its two primary banking partners and the real-time payment rails (SEN and Signet) that underpinned fiat settlement.
The Fed’s rate path is now complicated by financial stability concerns. The March banking crisis established a precedent: financial stability concerns can constrain monetary policy.
Conclusion
Three banks, five days, $320 billion in assets, and a Federal Reserve emergency programme that effectively backstopped the entire US banking system’s unrealised bond losses. The March 2023 banking crisis was contained, but the structural lessons are profound.
Sources: Wikipedia, FDIC (Chairman’s Testimony), FDIC (Signature Bank Report), CNN, New York City Bar Association
Related Reading
This article is part of our comprehensive coverage of the 2023 banking crisis. For the event that triggered the contagion, see Silicon Valley Bank Collapse: The Fastest Bank Run in History. The crisis then spread to Europe, as we covered in Credit Suisse Emergency: UBS Forced Merger and AT1 Bond Wipeout. The final bank to fall was First Republic Bank, Seized and Sold to JPMorgan.
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