Bank crisis may push investors towards asset diversification that does not rely on banks

As we assess the current state of the banking industry, it appears we are treading a road we’ve travelled before. Over the past week, three US banks — Silvergate Capital Corporation, Silicon Valley Bank and Signature Bank — have failed due to a series of unfortunate events. This was not surprising, but nonetheless concerning.

We find ourselves yet again in the throes of a banking crisis, one that seems destined to be solved by the all-too-familiar story of debasing the currency and printing more money. But let us not mince words, this is not a bailout, at least not in the traditional sense. No, the Federal Reserve is not simply “backstopping customer deposits”.

The Federal Reserve has announced its intention to “backstop customer deposits,” as a necessary step to prevent further damage to the US tech industry. However, we must consider the long-term implications of such actions. Is constant market intervention truly the answer? Or are we merely delaying the inevitable consequences of such strategies?

What we need to confront is that the current financial system is not a free market, but a highly controlled one. As we navigate this crisis, we must be mindful of the potential consequences of our actions and how they will impact the future. But before that, let’s run through what happened. The earlier collapse of FTX has had far-reaching effects across the financial landscape, and one of the most notable casualties has been Silvergate.

As one of FTX’s major clients, Silvergate Bank reported a staggering $1 billion in losses for the final quarter of 2022. In response, at the beginning of March the bank announced its plans to wind down operations and voluntarily liquidate.

On March 10, regulators shuttered SVB and seized its deposits in what is being termed the second-largest US banking failure since the 2008 financial crisis. The company’s downward spiral began late on Wednesday when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet.

It is worth noting that a considerable number of startups in Silicon Valley have accounts with this bank, primarily because of its location. Imposing restrictions on these accounts could have a significant impact on the operations of these startups. Some observers may interpret this development as a potential sign of trouble ahead for the bank, and perhaps even for the broader startup ecosystem it serves.

What followed was the rapid collapse of a highly respected bank that had grown alongside its technology clients. Similarly, Signature, another contender for the most “crypto-friendly” bank, was also shuttered by regulators, making it the third-biggest banking failure after SVB.

Compared to SVB and Silvergate, Signature didn’t have loans backed by cryptocurrencies or hold cryptocurrencies on its balance sheet. Instead, it had a payment platform for processing crypto transactions. But deposits associated with the crypto platform had been dropping, prompting some concern from Wall Street. With sentiments being all over the place and in efforts to avoid SVB’s scenario, poor old Signature became the next in line for the guillotine. But the important thing to note here is that these banks did not fail just because of the volatile cryptocurrency market. These collapses and seizures by regulators highlight the ongoing risks and uncertainties and lack of direction that is still faced by traditional markets.

Jeetu Kataria is CEO, DIFX Technology.