1. Home
  2. Banking


First Republic Bank’s Shares Downgraded to Junk Status by S&P Global; Stock Slides More Than 25% Lower

<div>First Republic Bank’s Shares Downgraded to Junk Status by S&P Global; Stock Slides More Than 25% Lower</div>After UBS acquired Credit Suisse and close to a dozen financial institutions injected $30 billion into First Republic Bank four days ago, S&P Global downgraded First Republic’s shares to junk status on Sunday. Investors are concerned that the cash infusion from 11 major financial institutions may not address the bank’s liquidity issues. First Republic’s shares […]

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Rattled crypto industry could emerge stronger after USDC depeg

Did the depegging reveal stablecoins’ limitations, or was it a learning moment?

USD Coin (USDC), the world’s second-largest stablecoin, may simply have been in the wrong place at the wrong time. 

The place was Silicon Valley Bank (SVB), a commercial bank with $209 billion in assets, where USDC issuer Circle had deposited $3.3 billion of its cash reserves for safekeeping.

The time was the present: one of rapidly rising interest rates in which institutions like SVB, which had long been gathering short-term deposits to buy long-term assets, got whipsawed.

For several harrowing days, USDC lost its peg to the U.S. dollar, sinking to as low as $0.85 (depending on the exchange) before recovering to $1.00 on Monday, March 13. This was the coin that many considered to be the poster child for fiat-based stablecoins, i.e., the most transparent, compliant and frequently audited.

An unpredictable turn of events?

“It’s ironic that what was supposed to be the safest place to put stablecoin reserves caused a depegging,” Timothy Massad, a research fellow at the Kennedy School of Government at Harvard University and former chairman of the United States Commodity Futures Trading Commission (CFTC), told Cointelegraph. “But it was a temporary problem, not an indication of fundamental design weakness,” he added.

Still, a depegging remains a serious affair. “When a stablecoin loses its peg, it defeats the purpose of its existence — to provide stability of value between the crypto and fiat worlds,” Buvaneshwaran Venugopal, assistant professor in the department of finance at the University of Central Florida, told Cointelegraph. A depegging unnerves existing and would-be investors, and it isn’t considered good for crypto adoption.

Some viewed this as an outlier event. After all, the last time a Federal Deposit Insurance Corporation (FDIC)-insured bank as large as SVB collapsed was Washington Mutual back in 2008.

“For a bank run like this to have happened would have been far-fetched to many — until the bank run happened,” Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Cointelegraph. “Part of the problem is that the banking partners for the crypto space tend to be some of the riskiest banks. Circle may not have had options at some of the bigger banks with safer profiles.”

Long-term consequences

The depegging raises a slew of questions about USDC and stablecoins — and the broader cryptocurrency and blockchain industry.

Will the U.S.-based stablecoin now lose ground to industry leader Tether (USDT), an offshore coin that kept its dollar peg during the crisis?

Was USDC’s depegging a “one-off” circumstance, or did it reveal basic flaws in the stablecoin model?

Recent: AI set to benefit from blockchain-based data infrastructure

Did Bitcoin (BTC), Ether (ETH) and some other cryptocurrencies demonstrate resilience during the bank crisis while some banks and stablecoins faltered? And, what more can be done to ensure that other depeggings don’t occur in the future?

“Some people will point to this as a reason to not encourage the development of stablecoins, while others will say that the vulnerabilities of large banks are exactly why we need stablecoins,” added Massad. Neither is really accurate in his view. What is needed is comprehensive banking and stablecoin regulation.

Investors could lose confidence in both USDC and the entire stablecoin sector in the short term, said Abraham, “but in the long term, I don’t think this will have a significant impact.” Still, the situation highlighted poor “treasury management” on the part of Circle, suggested Abraham, adding:

“Keeping almost 10% of total reserves in one bank that is not viewed as ‘too-big-to-fail’ is a risky move for any business, let alone one that purports to maintain a stable peg to the dollar.”

That said, Abraham expects Circle to learn from this experience and eventually emerge stronger than ever. “This scare will likely cause Circle to take a step back and think about better controls to institute, so it is not subject to extreme counterparty risk again. It will make USDC, already a great product, even safer.”

USDC was never really in any existential danger, in Abraham’s view. Even if the U.S. government had not stepped in to “back-stop” depositors, “USDC would have been fine as its deposits were already in the process of being transferred out prior to the FDIC receivership being initiated.” The billions in reserves held by SVB would have settled in another bank by March 13 in any event, Abraham said.

Bitcoin and Ether show robustness

The good news is that Circle survived, and crypto pillars like Bitcoin and Ether held up surprisingly well while the banking contagion spread to other institutions like Signature Bank, First Republic Bank and Credit Suisse.

“Is anyone else surprised that a top Stablecoin [USDC] could just depeg by ~10% instantly, with virtually no ripple effects across other coin prices? Especially since this is pretty core to a lot of DeFi trading,” tweeted Joe Weisenthal. ARK Invest’s Cathie Wood even celebrated cryptocurrencies as a safe haven during the banking crisis.

Others, though, were more measured. BTC and ETH began to fall on March 10 and the early part of that weekend, noted Abraham. “If the U.S. government had not stepped in to backstop depositors in the U.S., and HSBC had not bought the U.K. bank, there would likely have been significant pain across the crypto sector when the markets opened again on Monday [March 13].”

Bitcoin’s price fell slightly on March 9–10 before rebounding. Source: CoinGecko 

Others suggested that USDC basically did everything right; it was just unlucky. “USDC reserves are pretty much made up of cash and short-dated securities, with 80% held in the latter, probably the safest asset out there,” Vijay Ayyar, vice president of corporate development and global expansion at Luno, told Cointelegraph. “Hence, USDC in itself has no real issues if one takes a deeper look at what transpired.”

In Ayyar’s view, the more urgent need is “to have a full reserve dollar digital system that helps us move away from the systemic risks in the current fractional system.”

What does this mean for stablecoins?

What does this decoupling signify for stablecoins in general? Does it prove that they’re not really stable, or was this a one-off event where USDC happened to find itself in the wrong Federal Reserve-member bank? One lesson arguably learned is that stablecoin survivability isn’t entirely about reserves. Counterparty risk also has to be considered.

“Fiat-backed stablecoins have a number of intersecting risk factors,” Ryan Clements, assistant professor at the University of Calgary Faculty of Law, told Cointelegraph, further explaining:

“Much of the discussion to date on the risks of fiat-backed coins like USDC has focused on the issue of reserve composition, quality and liquidity. This is a material concern. Yet it is not the only concern.”

During the current crisis, many people were surprised “at the extent of the duration mismatch and lack of interest rate hedges at SVB, as well as the extent of Circle’s exposure to this bank,” said Clements.

Other factors that can unhinge a stablecoin are issuer insolvency and reserve custodian insolvency, said Clements. Investor perceptions also have to be considered — especially in the age of social media. Recent events demonstrated “how investor fears of reserve custodian insolvency can catalyze a depegging event due to a redemption run against the stablecoin issuer and a sell-off of the stablecoin on secondary crypto-asset trading platforms,” he added.

As the University of Central Florida’s Venugopal earlier said, depeggings erode the confidence of new investors and potential investors sitting on the fence. “This further delays the widespread adoption of decentralized financial applications,” said Venugopal, adding:

“The one good thing is that such mishaps bring in more scrutiny from the investor community — and regulators if the ripple effects are large enough.”

Wherefore Tether?

What about USDT, with its peg holding steady throughout the crisis? Has Tether put some distance between itself and USDC in the quest for stablecoin primacy? If so, isn’t that ironic, given Tether has been accused of a lack of transparency compared with USDC?

“Tether has also had its share of questions raised previously with regard to providing audits on its holdings, which has resulted in a depeg previously,” said Luno’s Ayyar. “Hence, I don’t think this incident proves that one is stronger than the other in any way.”

“The crypto markets have always been rich in irony,” Kelvin Low, a law professor at the National University of Singapore, told Cointelegraph. “For an ecosystem that is touted to be decentralized by design, much of the market is centralized and highly intermediated. Tether only appears to be stronger than USDC because all of its flaws are hidden from view.” But flaws can only be hidden for so long, Low added, “as the FTX saga demonstrates.”

Still, after dodging a bullet last week, USDC may want to do things differently. “I suspect that USDC will seek to strengthen its operations by diversifying its reserve custodian base, holding its reserves at a larger bank with stronger duration risk management measures and interest rate hedges, and/or ensuring that all reserves are adequately covered by FDIC insurance,” said the University of Calgary’s Clements.

Lessons learned

Are there any more general insights that can be drawn from recent events? “There’s no such thing as a completely stable stablecoin, and SVB perfectly illustrates that,” answered Abraham, who, like some others, still views USDC as the most stable of stablecoins. Still, he added:

“For it [USDC] to go through a 10% depegging event shows the limitations of the stablecoin asset class as a whole.”

Moving forward, “It will also be very important for stablecoin investor transparency to continually know what proportion of reserves are held at which banks,” said Clements.

Low, a crypto skeptic, said that recent events demonstrated that no matter what their design, “all stablecoins are susceptible to risks, with algorithmic stablecoins perhaps the most problematic. But even fiat-backed stablecoins are also susceptible to risk — in this case, counterparty risk.”

Also, stablecoins “are still subject to the risk of loss of confidence.” This applies to cryptocurrencies like Bitcoin, too; even though BTC has no counterparty risk or depegging issues, continued Low. “Bitcoin prices are [still] susceptible to downside pressures when there is a loss of confidence in the same.”

Recent: Silicon Valley Bank’s downfall has many causes, but crypto isn’t one

Ayyar stated that USDC already had diverse banking partners, with only 8% of its assets at SVB. “Hence, that in itself is not the solution.” One needs to think more long-term, he suggested, including implementing comprehensive consumer protections “as opposed to relying on the current patchwork approach.”

As for former CFTC chief Massad, he cited the need for reforming both stablecoins and banking, telling Cointelegraph:

“We need a regulatory framework for stablecoins, as well as an improvement in the regulation of mid-size banks — which may require a strengthening of the regulations, better supervision, or both.”

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Blockchain to Become More Relevant in Payments This Year, Sberbank Exec Says

Blockchain to Become More Relevant in Payments This Year, Sberbank Exec SaysBlockchain technology can help solve current issues with settlements, according to the deputy chief executive of Sberbank. Russia’s largest bank is working with other financial institutions to develop blockchain-based payment applications, the banker revealed. Sberbank Sees Solution to Russia’s Troubles With Settlements in Blockchain With major Russian banks disconnected from the main global interbank payment […]

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

UBS Considers Acquiring Credit Suisse, Requests Government Backstop in Deal

UBS Considers Acquiring Credit Suisse, Requests Government Backstop in DealAfter Credit Suisse Group AG announced it would borrow 50 billion Swiss francs from the Swiss National Bank, UBS Group AG is reportedly considering acquiring the banking giant. However, UBS is requesting that the government issue a backstop to protect against any losses if it purchases Credit Suisse. According to unnamed sources familiar with the […]

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

More 186 US banks well-positioned for collapse, SVB analysis reveals

Rising interest rates, which brought down the U.S. banking system’s market value of assets by $2 trillion, combined with a large share of uninsured deposits at some U.S. banks, threatens their stability.

The perfect mix of losses, uninsured leverage and a greater loan portfolio, among other factors, resulted in the fall of Silicon Valley Bank (SVB). Comparing SVB’s situation with other players revealed that nearly 190 banks operating in the United States are at potential risk of a run.

While SVB’s collapse came as a reminder of the fragility of the traditional financial system, a recent analysis by economists showed that a large number of banks are just uninsured deposit withdrawals away from a devastating collapse. It read:

“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”

Monetary policies penned down by central banks can have a negative impact on long-term assets such as government bonds and mortgages, which can, in turn, create losses for banks. The report explains that a bank is considered insolvent if the mark-to-market value of its assets — after paying all uninsured depositors — is insufficient to repay all insured deposits.

Largest insolvent institutions if all uninsured depositors run. Source: papers.ssrn.com

The data in above graph represents the assets based on bank call reports as of Q1, 2022. Banks in the top right corner, alongside SVB (with assets of $218 billion), have the most severe asset losses and the largest runnable uninsured deposits to mark-to-market assets.

The recent rise in interest rates, which brought down the U.S. banking system’s market value of assets by $2 trillion, combined with a large share of uninsured deposits at some U.S. banks, threatens their stability.

“Recent declines in bank asset values significantly increased the fragility of the US banking system to uninsured depositors runs,” the study concluded.

Related: Breaking: SVB Financial Group files for Chapter 11 bankruptcy

As the federal government steps in to protect the depositors of SVB and Signature Bank, President Joe Biden assured no impact on taxpaying citizens.

However, many pointed out to Biden on Twitter that “everything you do or touch costs the taxpayer!”

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Undeterred by Fears of a Banking Crisis, ECB Raises Interest Rates by 50bps

Undeterred by Fears of a Banking Crisis, ECB Raises Interest Rates by 50bpsThe European Central Bank (ECB) has convened to raise three of its key interest rates by 50bps (0.5%), fueled by the persistence in the inflation numbers reported by the bloc. Christine Lagarde, president of the institution, stated that the banking sector in Europe was resilient and that the institution was ready to provide liquidity if […]

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Protego’s conditional national bank status expired without approval: Report

In a week when the crypto industry — and the rest of the world — was beset by bad news about banking, one more banking setback has come to light.

Institutional cryptocurrency custodian Protego’s conditional national trust banking charter has expired without it receiving permanent approval, according to a March 17 report in Fortune.

A spokesperson for the United States Office of the Comptroller of the Currency (OCC) told Fortune that the firm did not meet pre-conversion requirements. According to the spokesperson:

“[The] pre-conversion requirements included policies, procedures, systems and other measures to ensure the safe and sound operation of the bank as well as meeting minimum capital and liquidity requirements.”

Protego, based in Washington state, was granted an 18-month conditional charter in February 2021, and it was extended once. Under a conditional charter, an organization cannot accept deposits. An unnamed source told Fortune that Protego had lined up agreements on the necessary financing to meet charter requirements by the Feb. 4 deadline, but it did not receive a firm answer about its charter.

An OOC bulletin dated March 5–11 listed Protego and indicated that time had expired on its conversion on Feb. 4.

Related: 89% still trust centralized custodians despite 2022’s collapses: Survey

Protego founder and executive chair Greg Gilman told Fortune that he felt the company had met the financing requirement and the company could either reapply to the OCC, which is a division of the federal Treasury Department, or apply to state authorities to operate as a state bank.

A federal charter would have allowed Protego to custody digital assets and perform credentialing functions, such as Know Your Customer measures. At present, Anchorage Bank is the only crypto firm to receive a national banking charter.

Custodia Bank was denied a place in the Federal Reserve System on Feb. 23. Paxos also received a conditional national trust bank charter in 2021. A spokesman said that the company “continues to work constructively with the OCC” on its pending application.

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Banking crisis: What does it mean for crypto?

In our latest Cointelegraph Report, we broke down the main events that led to the collapse of Silvergate, SVB and Signature Bank and explain what this all could mean for crypto.

Last week’s rapid collapse of Silvergate, Silicon Vallley Bank and Signature Bank have highlighted the fragility of the traditional banking sector while depriving crypto of the main fiat on-ramp points in the U.S. 

Most observers agree that the collapse of SVB, like the one of Silvergate, was largely the result of unfavourable market conditions and poor risk management. 

The shutdown of Signature was more controversial. According to multiple sources, the bank was not facing insolvency and had largely stabilized its capital outflow when U.S. regulators decided take over it last Sunday. Many in the crypto industry saw it as a political decision, aimed at pushing crypto out of the U.S.

Silvergate and Signature were the two main financial institutions providing banking services to crypto companies in the US: following their shutdown, it will be far more challenging for crypto companies to interact with the dollar system.

In the meantime, The collapse of SVB seemed have caused a ripple effect across the global banking sector: Credit Suisse, the second largest Swiss financial institution, is going through a severe crisis which required the Swiss Central Bank to intervene with a $54 billion lifeline. 

If you want to know more about the ongoing banking crisis and how it is affecting cryptocurrencies, check out ourr latest Cointelegraph Report and don’t forget to subscribe to our YouTube channel! 

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

US Bank Outflows and Concerns Mount: 11 Banks Bail Out First Republic Bank From Collapse

US Bank Outflows and Concerns Mount: 11 Banks Bail Out First Republic Bank From CollapseAfter the fall of Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank (SNBY), First Republic Bank, a commercial bank and wealth management services provider, is the latest financial institution to receive a bailout. Close to a dozen lenders announced they will deposit $30 billion into the beleaguered bank’s coffers to shore up liquidity. U.S. […]

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Blame traditional finance for the collapse of Silicon Valley Bank

Silicon Valley Bank’s downfall was a product of traditional finance — critics shouldn’t conflate the issue with cryptocurrency.

The entire banking concept is based on the assumption that depositors will not want to withdraw their money at the same time. But what happens when this assumption fails? The answer lies in the asset-liability mismatch of banks, which can lead to disastrous consequences for the broader financial system. 

Silicon Valley Bank (SVB), one of the leading banks for startups and venture capital firms in the United States, failed because of a liquidity crisis that has reverberated throughout the startup ecosystem. Silicon Valley Bank’s struggles shed light on the many risks inherent in banking, including mismanaging the economic value of equity (EVE), failing to hedge interest rate risk, and a sudden outflow of deposits (funding risk). Risk arises when a bank’s assets and liabilities are not properly aligned (in terms of maturity or interest rate sensitivity), leading to a mismatch that can cause significant losses if interest rates change.

The failure to hedge interest rate risk leaves banks vulnerable to changes in the market that can erode profitability. Funding risk occurs when a bank is unable to meet its obligations due to an unexpected outflow of funds, such as a run on deposits. In SVB’s case, these risks combined to create a perfect storm that threatened the bank’s survival.

Related: Silicon Valley Bank was the tip of a banking iceberg

SVB recently made strategic decisions to restructure its balance sheet, aiming to take advantage of potential higher short-term interest rates and protect net interest income (NII) and net interest margin (NIM), all with the goal of maximizing profitability.

NII is a crucial financial metric used to evaluate a bank’s potential profitability, representing the difference between interest earned on assets (loans) and interest paid on liabilities (deposits) over a specific period, assuming the balance sheet remains unchanged. On the other hand, EVE is a vital tool that provides a comprehensive perspective of the bank’s underlying value and how it responds to various market conditions — e.g., changes in interest rates.

The surfeit of capital and funding in recent years resulted in a situation where startups had excess funds to deposit but little inclination to borrow. By the end of March 2022, SVB boasted $198 billion in deposits, compared to $74 billion in June 2020. As banks generate revenue by earning a higher interest rate from borrowers than they pay depositors, SVB opted to allocate the majority of the funds into bonds, primarily federal agency mortgage-backed securities (a common choice) to offset the imbalance caused by significant corporate deposits, which entail minimal credit risk but can be exposed to substantial interest-rate risk.

Deposits at all commercial banks in the United States, 1973-2023. Source: St. Louis Federal Reserve

However, in 2022, as interest rates escalated steeply and the bond market declined significantly, Silicon Valley Bank’s bond portfolio suffered a massive blow. By the end of the year, the bank had a securities portfolio worth $117 billion, constituting a substantial portion of its $211 billion in total assets. Consequently, SVB was compelled to liquidate a portion of its portfolio, which was readily available for sale, in order to obtain cash, incurring a loss of $1.8 billion. Regrettably, the loss had a direct impact on the bank’s capital ratio, necessitating the need for SVB to secure additional capital to maintain solvency.

Furthermore, SVB found itself in a “too big to fail” scenario, where its financial distress threatened to destabilize the entire financial system, similar to the situation faced by banks during the 2007–2008 global financial crisis (GFC). However, Silicon Valley Bank failed to raise additional capital or secure a government bailout similar to that of Lehman Brothers, which declared bankruptcy in 2008.

Related: Why isn't the Federal Reserve requiring banks to hold depositors' cash?

Despite dismissing the idea of a bailout, the government extended “the search for a buyer” support to the Silicon Valley Bank to ensure depositors have access to their funds. Furthermore, the collapse of SVB resulted in such an imminent contagion that regulators decided to dissolve Signature Bank, which had a customer base of risky cryptocurrency firms. This illustrates a typical practice in conventional finance, wherein regulators intervene to prevent a spillover effect.

It is worth noting that many banks experienced an asset-liability mismatch during the GFC because they funded long-term assets with short-term liabilities, leading to a funding shortfall when depositors withdrew their funds en masse. For instance, an old-fashioned bank run occurred at Northern Rock in the United Kingdom in September 2007 as customers lined up outside branches to withdraw their money. Northern Rock was also significantly dependent on non-retail funding like SVB.

Continuing the Silicon Valley Bank case, it is evident that Silicon Valley Bank’s exclusive focus on NII and NIM led to neglecting the broader issue of EVE risk, which exposed it to interest rate changes and underlying EVE risk.

Moreover, SVB’s liquidity issues stemmed largely from its failure to hedge interest rate risk (despite its large portfolio of fixed-rate assets), which caused a decline in EVE and earnings as interest rates rose. Furthermore, the bank faced funding risk resulting from a reliance on volatile non-retail deposits, which is an internal management decision similar to the ones previously discussed.

Therefore, if the Federal Reserve’s oversight measures were not relaxed, SVB and Signature Bank would have been better equipped to handle financial shocks with stricter liquidity and capital requirements and regular stress tests. However, due to the absence of these requirements, SVB collapsed, leading to a traditional bank run and the subsequent collapse of Signature Bank.

Moreover, it would be inaccurate to entirely blame the cryptocurrency industry for the failure of a bank that coincidentally included some crypto companies in its portfolio. It's also unjust to criticize the crypto industry when the underlying problem is that traditional banks (and their regulators) have done a poor job of evaluating and managing the risks involved in serving their clientele.

Banks must begin taking necessary precautions and following sound risk management procedures. They cannot merely rely on the Federal Deposit Insurance Corporation’s deposit insurance as a safety net. While cryptocurrencies may present particular risks, it is crucial to understand that they have not been the direct cause of any bank's failure to date.

Guneet Kaur joined Cointelegraph as an editor in 2021. She holds a master of science in financial technology from the University of Stirling and an MBA from India’s Guru Nanak Dev University.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets