Are we heading to a bank crisis in the US?

The fall of the Silicon Valley Bank came as a surprise to many. The Silicon Valley Bank is a 40-year-old bank in California that most venture-backed startups use. At its insolvency, it had about $209 billion in assets and was the 16th largest bank in the United States.

SVB is strong in the startup scene, and there are claims that it banked at least half of the US’s venture-backed startups.

They lured startups by offering attractive loans in return for these startups, using them as an exclusive bank. They had strong relationships with founders and VCs and offered them incentives such as attractive mortgage deals.

As is the policy, every bank must be insured. SVB was FDIC insured, but FDIC insurance only protects accounts that hold up to $250K. This did not work well for SVB as over 85% of the accounts had over $250K.

SVB faced massive growth as there was a spike in the number of deposits from 61 billion at the end of 2019 to 189 billion at the end of 2021. The increase in liquidity is due to fundraising avenues and different activities such as IPOs, venture capital investments, acquisitions, etc. That means SVB had many assets they needed to generate a return on. To generate a return while still investing in relatively safe assets, they decided to buy longer-dated securities such as treasury bonds and mortgage-backed securities. Unfortunately, this buying took place when rates were near record lows. By the end of 2022, SVB had over $120 billion in these securities versus only $74 billion in loans.

When the FED increased interest rates, it affected the VC landscape last year. There was less funding going to startups as the VC’s found it better to invest in bonds and government securities. This made deposits going to SVB decrease. This began a crisis as SVB had invested in long-term assets. SVB did not have interest rate hedges or proper risk management. Losses started piling up, and at the end of 2022, SVB had marked market losses on those securities over $15 billion, almost equivalent to its entire equity base of $16.2B. That means that if depositors want their money back, they will not have money.

They decided to compensate by making a share sale. When the news of the share sale went out, the stocks plunged. VCs then advised their companies to withdraw their funds from SVB. The startups and founders were in a scramble to withdraw funds.

Effect on Crypto

SVB collapse impacted Circle as Circle used them to bank the USDC stablecoin. UDSC is a fiat-backed stablecoin with an equivalent to the dollar. There were fears that it would fall off the hook. Circle announced that it has 3 billion out of its 40 billion reserves, about 8% of the amount.

A bank run?

There were fears that the SVB situation would lead to a bank run, as many banks have similar structures. There are many losses from fixed-income securities, which would affect their liquidity. For fear of a bank run, many started pulling funds from their accounts as no one was sure how fragile the US banking system was. The FDIC covers only 1.3% of their deposits, while the banking system has a total of $22 trillion. That means there were high chances of a bank run.

There are up to 65000 startups affected by SVB. If they cannot access funds, it may halt their operations, such as payrolls, making employees quit.

Unfortunately, bank runs do not discriminate on who the account holders are, and it may affect up to regional banks.

Increased interest rates have affected liquidity, leading to losses in bank balance sheets.

What does the future hold?

To rescue the situation, the FDIC and FED revealed working on a fund that will backstop deposits. The treasury Federal Reserve and the FDIC announced that they would be backstopping all the deposits at SVB so that customers could access their funds. This restored banking confidence and also helped Circle to recover. That was a brilliant move by the US government as there would be a wide-scale banking crisis.

The SVB crisis indicates that the fractional Reserve banking system is structurally unstable.

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Recession, Inflation, and Geopolitical risk: Key concerns for investors in 2023

JP Morgan’s 835 institutional clients participated in an e-trading survey. The survey was directed to those who use their e-trading services. This is the seventh year conducting the survey, and the clients were sampled from over 60 locations.

They discussed different issues that affect the investment space. They discussed issues such as AI vs blockchain, inflation vs recession, war, pandemic, etc. The survey is a great way to get institutional investors’ insights and the risks they foresee in the market.

Which developments the traders think are likely to shape the markets in 2023?

From the survey, the biggest concern is a recession at 30% of the respondents. 26% of the respondents said their biggest concern is inflation.19% mentioned geopolitical conflict, 14% said market and economy dislocation, 9% said government policy change while 1% of the respondents mentioned ESG/climate risk factors. Interestingly, no one mentioned the global pandemic as a source of concern.

The results are different from the ones last year. In 2022, inflation topped the list at 48%, then 13% cited market and economy dislocation, 13% mentioned global pandemic, 5% recession and 3% ESG/climate risk factors. Last year, geopolitical conflict was not a concern.


China plans to open up its economy, which will impact the global market. China opening up translates to more demand for global commodities. This will affect inflation as there will be more inflation for products on demand and their derivatives worldwide.

There will be increased demand for travel by the Chinese. This means more inflation for travel.

China opening up and many other factors make recession a big risk this year. A high recession will mean more damage to the economy.

Geopolitical conflict

Geopolitical conflict is a higher risk than last year. The war against Russi and Ukraine has been a big contributor. There are also cold war tensions between China and the US.

The dislocation between the market and the economy

There could be a situation in which stocks, bonds or crypto prices are likely not to reflect what is happening in the broader economy. Although the economic conditions seem to worsen, pricing does not reflect that. This is a risk for investors when it comes to capital allocation.

Government policy change

It was not a concern last year. It may be caused by changes in the US around the control of the House of Representatives. More market-friendly measures could mean more of a boost for the markets. This is a risk as it may lead to more gridlock, e.g. the US debt ceiling clash. If the US did not agree, it would affect the global financial market.

ESG/Climate risk factors

Climate change is no longer a real concern for investors as they feel there are more pressing issues to address.


When investors were asked to compare inflation this year to last year, 44% of the investors said they see it going down this year, and 37% said it would level off. The different opinions were based on their location. Those in the UK and Europe have a different view on inflation than those in the US. The US believe inflation will come down this year.

Inflation expectations are important as the inflation data as the expectations can drive inflation higher.

What is the greatest daily trading challenge in 2023?

Investors believe that market volatility will be the biggest challenge to trading. From the survey, volatile markets were top at 46%, followed by liquidity availability at 22%, workflow efficiency at 9%, and others. The results differed from last year, as the biggest concern last year was the availability of liquidity.

Trading technology in 2023?

53% of traders believe AI/machine learning will be the most influential in trading in the next three years. This will be followed by API integration, blockchain and distributed ledger technology.

Top 3 Market structure concerns?

The main market structure concern is access to liquidity, followed by regulatory change and market fragmentation. Just like last year, access to liquidity was top of the list.

Trends in the electronic trading space or percentage of their trading volume will be through e-trading channels?

The respondents predict that crypto assets and digital coins will likely see the most growth in institutional electronic trading. These include API multi-dealer platforms and single-dealer platforms. This is significant as it shows that investors are increasingly moving their crypto trading activities to these more institutionalized Services.

Several large companies on Wall Street have started to open their e-trading technologies up for crypto-related trading, e.g. the Aladdin platform started offering Bitcoin Trading.

This will create more efficient and liquid markets, which helps to reduce volatility and improve price discovery. It is a positive force for institutional crypto adoption.

What describes your focus on crypto?

72% have no plans to trade crypto/digital coins, and 14% plan to start trading within five years. Only 8% were trading crypto/digital coins. It means less institutional money in the crypto space. Less activity may be due to regulatory scrutiny by the SEC.

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Can Banks Steal your Money? The rise of bank bail-ins.

The financial crisis in 2008 was a game-changer in the financial industry. The housing bubble’s collapse led to bankruptcy, which affected even Wallstreet.

The U.S. treasury came in to rescue wall street by giving over 200 billion dollars in loans to hundreds of financial institutions. Even though it was a good amount, it was insufficient as it accounted for only about 30% of the total cost of bailing out the entire Financial system, which is estimated to be 700 billion dollars. Wall Street speculation was to blame though only one person went to jail, Kareem Sarah. The SEC allegedly destroyed the evidence given as part of the investigation. The bank bailouts are why Satoshi Nakamoto created bitcoin.

Financial crisis solution – Bail-ins

Politicians had a plan for new regulations. An example is the Dodd-Frank Act.

According to the Dodd-Frank Act, derivatives claims come first in the event of a financial collapse. That means that in the event of a financial crisis, derivatives debt owed by big banks will be paid off before anything else. The difference is that these debts won’t be paid off by bailouts but by bail-ins.

A bailout is when a big bank receives money from someone else to pay back its debts, while a bail-in is when a big bank uses its clients’ money to pay back its debts. It means the bank will use your deposits in accounts or money you lent it to pay debts.

Dodd-Frank Act opened the door to allowing big Banks to use their client funds to bail in themselves in a financial crisis.

The people in power had been working on alternatives to bailouts since 2008. The urgency to develop an alternative to bailouts increased after the financial crisis started to affect Europe.

In mid-2012, the IMF published a paper advocating bail-ins as the ideal alternative to bailouts. It, however, needed a ground to test out the bail-ins.

Cyprus – the testing ground

Cyprus was one of the European countries hit the hardest by the financial crisis. By the end of 2012, Cyprus was desperate for a bailout. In early 2013, the IMF and the European Union bailed Cyprus for 10 billion euros. The IMF gave Cyprus multiple conditions; one was for Cyprus’s largest bank to execute the first-ever bail-in. Almost 50 percent of all bank account balances worth more than one hundred thousand Euros were seized.

The United States was the first to legalize bail-ins in 2010. The Dodd-Frank Act pushed the U.K. to follow suit in 2013. With the financial services act, the E.U. legalized bail-ins in 2016.

Bank Bail-in laws tend to vary from country to country. Although the laws may differ, they follow the same three rules, likely because of their Collective Conformity with the FSB. The three rules are:

  1. Bank bail-ins are only allowed for banks that are deemed to be domestically or globally important.

This rule pertains to those with the most assets under management. The FSB publishes a list of globally important banks every year. There are currently 30 globally systemically important banks, with JP Morgan being noted as the highest risk.

  • Bank bail-ins do not apply to bank balances below the deposit Insurance threshold.

In the U.S., the FDIC covers 250 000 deposits. In the U.K., the FSCS covers 85 000 pounds, and in the E.U., it’s 100 000 Euros with various insurers involved. Insurance funds in the U.S. and Europe are woefully underfunded, particularly when we factor in derivative claims.

Insurers don’t have enough money to cover all Bank deposits. In the case of the FDIC, its 2021 annual report suggests that it only has around 120 billion dollars in its Insurance Fund, which is low compared to the 19 trillion dollars of Bank deposits in the U.S.

  • The third rule of bank bail-ins states that you will be given some alternative asset in exchange for your lost deposits. Alternative assets are typically shares in the bank that you bailed out.

Even though bail-ins may be a good solution for banks and financial institutions, they may be inconvenient to end users. For instance, you could temporarily lose access to your funds during a bank bail-in. Banks could put limits on their hours of operations, payments, transfers, and limits on cash withdrawals until the bail-in process is complete.

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The Battle Between TradFi and DeFi

Heap of dollar bills eyeglasses and Bitcoin coins. Cryptocurrency analyzing concept

You may have seen numerous articles about decentralized finance (DeFi) and its claims that it will radically change the traditional finance (TradFi) sector. DeFi supporters state that there is a core need for an open, transparent, and secure financial system, and that TradFi simply doesn’t provide that. Essentially, DeFi positions itself as an alternative to the banking system we currently have.

One of the arguments for DeFi is that because it is a blockchain-based concept, it is outside of governmental and regulatory control. This has a strong appeal to those who are concerned about what we have learnt about personal data collection by commercial entities and governments.

DeFi answers the desire for data security and privacy. It also “leverages a set of progressive, agile tools to give control to users,” according to Stably. It also offers features that traditional finance can’t provide, and this makes it an attractive alternative to the current system.

But what are the real differences between DeFi and TradFi? There are three key differences:

  1. In DeFi the public blockchain is the source of trust, whereas in TradFi it is regulatory bodies that are the source of trust.
  2. DeFi is gaining traction because it is open and transparent, and there are fewer barriers to accessing it. The opposite is true of TradFi, especially in terms of the barriers to access, which leaves billions of people unbanked worldwide.
  3. TradFi has its hands tied by regulatory forces, which makes it extremely difficult for its institutions to act with the same agility as DeFi projects.

DeFi’s use cases

There are also three strong use cases for DeFi.

1. Banking

Unlike TradFi, DeFi projects are able to offer banking without borders. TradFi struggles with this, and as mentioned before, this has left billions globally without a banking service. DeFi’s use of blockchain technology overcomes that issue and allows people in developing countries and rmote areas with access to banking via their mobile phone.

2. Circumventing oppressive governments

Oppressive governments are prone to issuing bans and restrictions on financial movement. TradFi can’t offer solutions, but again, because DeFi uses the blockchain and associated tools, it is able to circumvent government restrictions and provide uncensored global financial services.

  • Creative finance

There is a level of creativity in DeFi projects in terms of developing new features and functions. In the past TradFi had a monopoly on financial products, but even those products associated with TradFi can be moved over onto the blockchain, giving DeFi another advantage.

Challenges to overcome

Naturally, while DeFi has advantages, it doesn’t have a clear home run. It also faces challenges.  The biggest one is not hard to identify, and you don’t need to even ask an expert: it is getting the general public to trust the idea of unregulated open-source code. Cryptocurrency doesn’t yet have mass adoption and there is widespread mistrust of it, which bleeds over into the DeFi sector by association. There are fears about hacks amongst other things. Indeed, the DeFi tech is still in its infancy, with much work to be done to make it more trustworthy for a wider audience beyond DeFi fans.

Ultimately, DeFi has a way to go, but it undoubtedly has potential, and certainly as a way to give more people access to banking services. If its works hard on scalability, security and liquidity, it has a real opportunity to replace TradFi.