The collapse of two major banks in the United States, Silvergate and SVB Financial Group, has shaken the American financial system. And some economists are claiming that a full-scale banking crisis has started. What is even more worrying is that these banks served two crucial economic sectors - the tech industry and the cryptocurrency industry.

Both banks faced challenges due to external factors.

SVB Financial Group (Silicon Valley Bank)

SVB Financial Group, which was the lender to Silicon Valley startups, failed on March 10, 2023, and fell into the hands of the Federal Deposit Insurance Corporation (FDIC). The FDIC has taken control of the banking company, which has awakened the ghosts of the 2008 banking and financial crisis. 

SVB, was a central player in the innovation economy. It was the backbone of the tech industry in Silicon Valley, playing a crucial role in the startup ecosystem by providing specialized financial services, industry expertise, a valuable network, and a strong reputation.

SVB suffered from the rise in interest rates from the Federal Reserve. This did some damage to the value of its investment assets, especially bonds. As a result, the bank had to resort to a capital raise. Many startups withdrew their deposits from the bank since they were burning a lot of cash. SVB had to sell bonds, primarily U.S. Treasury securities, at a discount to cover these withdrawals. But its attempt to raise the needed $2.25 billion failed.

Silvergate

Silvergate, the crypto bank, collapsed two days earlier. The bank was where most of the big crypto firms went, as traditional banks did not want to do business with them.

Silvergate had been established in 1988, initially specializing in lending to industrial customers and offering loans for both residential and commercial real estate. 

In 2013, the bank began to court crypto firms, as traditional banks were reluctant to do so due to the opacity prevailing in the sector.

Silvergate's collapse was due to pressure from regulators, in particular the Department of Justice, which opened an investigation into its business relations. They were investigating the former Crypto King, Sam Bankman-Fried.

Bankman-Fried has been charged with 12 counts of fraud, stemming from the collapse of his crypto empire, the cryptocurrency exchange FTX, and its sister company, Alameda Research.

Banking crisis feared

The collapse of these two banks has raised concerns about the stability of other U.S. banks. 

Economist Peter Schiff has warned that the U.S. banking system seems on the verge of a much bigger collapse than in 2008. 

Banks own long-term paper at extremely low-interest rates and can't compete with short-term Treasuries. Mass withdrawals from depositors seeking higher yields could result in a wave of bank failures.

Goldman Sachs analysts take the opposite view. They are telling investors to take advantage of the fallout from the collapse of Silicon Valley Bank. And say the contagion is unlikely to spread from small regional lenders.