Economist Nouriel Roubini. File.
Washington: Economist Nouriel Roubini, nicknamed as Wall Street’s ‘Doctor Doom’, has warned that any exchange or financial scheme in the crypto space can go bust faster if Silicon Valley Bank can go bust in a day.
Silicon Valley Bank (SVB), the 16th largest bank in the United States, which catered to the tech industry for three decades, collapsed on Friday (10 March, 2023) after the Santa Clara, California-based lender suffered from an old-fashioned bank run.
The SVB collapsed in mere 48 hours on the heels of the financial institution’s announcement of its intentions to raise $2.25 billion funds to paper the cracks or losses caused in its balance sheet by the sale of assets, mainly government bonds.
State regulators seized the bank and made the Federal Deposit Insurance Corporation (FDIC) its receiver. SVB was the biggest US lender to fail since the 2008 global financial crisis and the second-biggest ever.
Roubini, who is known for his dire global economic predictions, in a tweet said: “If a bank like SVB can go bust in one day ANY exchange or financial scheme in the crypto space can go bust faster. They are like banks- massive maturity mismatch & shoddy assets- & don’t have the liquidity/capital, deposit insurance & LOLR (lender of last resort) option of real banks. Extinction ahead! So crypto system in on its way to systemic meltdown.”
If a bank like SVB can go bust in 1 day ANY exchange or financial scheme in the crypto space can go bust faster. They are like banks- massive maturity mismatch & shoddy assets- & don’t have the liquidity/capital, deposit insurance & LOLR option of real banks. Extinction ahead!
— Nouriel Roubini (@Nouriel) March 11, 2023
In another post, Roubini said: “While SVB was unique in its vulnerability to unrealised security losses to wipe out it equity, many other US banks would have 1/3 to 1/2 of their capital wiped out if losses are realised. Even a modest run on their deposits will force them to sell some securities like SVB.”
US banks have roughly $620bn of unrealised losses. Their overall equity is $2.2tn. That is 28% of equity & includes banks like JPM or Citi where the ratio is much lower. For many smaller banks the ratio is close to 50%. So if a run were to occur they will be near dead like SVB! pic.twitter.com/vx5nrCTC7j
— Nouriel Roubini (@Nouriel) March 12, 2023
He further stated the US banks have roughly $620 billion of unrealised losses. Their overall equity is $2.2 trillion, that is 28 per cent of equity and includes banks like JPM or Citi where the ratio is much lower.
“For many smaller banks the ratio is close to 50 per cent. So if a run were to occur they will be near dead like SVB!” he added.
US banks have roughly $620bn of unrealised losses. Their overall equity is $2.2tn. That is 28% of equity & includes banks like JPM or Citi where the ratio is much lower. For many smaller banks the ratio is close to 50%. So if a run were to occur they will be near dead like SVB! pic.twitter.com/vx5nrCTC7j
— Nouriel Roubini (@Nouriel) March 12, 2023
Crypto is a ‘scam’
Calling crypto a ‘scam’, Roubini has been warning investors against buying it. Earlier in January, he said 99 per cent of crypto is a scam.
Speaking to Yahoo Finance, he said: “Literally 90% of crypto is a scam. A criminal activity. A total real-bubble Ponzi scheme that is going bust.”
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“You have to stay away [from crypto]. You have to absolutely stay away. Most of these people belong literally in jail. Literally, they’re all crooks,” he had said.
Roubini had also said crypto exchange FTX and its founder Sam Bankman-Fried (SBF) were “not an exception” — “they’re a rule”. Founded in 2019, FTX west bust in November last year.
What led to SVB collapse?
Founded in 1983, SVB has been biggest financial support for almost half of US venture-backed technology and health care companies. It also served media companies including Vox Media.
The bank also had deposits from several cryptocurrency firms. As per reports, SVB became a survivor for start-up founders as it lent money even when no other bank did. It also was known as the “go-to bank for investors”.
Just like other banks, SVB invested the money of depositors into safe instruments such as bonds. After the 2008 depression, interest rates in the US were very low. This ensured cheaper loans, and venture capitalists invested more money into the start-ups which benefitted banks like SVB because these start-ups trusted them with their deposits.
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However, the US Federal Reserve last year began increasing the interest rates. From 0.25-0.50 per cent in March 2022, the rate has now been hiked to 4.5-4.75 per cent. Fed Chair Jerome Powell recently indicated that the interest rates might be increased to 5.75 per cent.
The rate hike reduced the returns on bonds. Also, higher interest rates led to a slowdown in start-up funding and this led to reduction in pace of deposits at SVB.
On 8 March, SVB said it sold $21 billion of securities at a loss of $1.8 billion to ensure liquidity. It was also planning to sell $2.2 billion worth of shares.
The bank’s credit rating was downgraded by Moody’s and the same day Peter Thiel’s Founder’s Fund asked its portfolio companies to pull out their money from SVB. A host of venture capitalists including Union Square Ventures and Coatue Management also echoed the same.
Due to this, SVB was unable to meet high demand for withdrawal at such a short notice. As per reports, on a single-day on 9 March, the customers tried withdrawing $42 billion from the bank which was said be equal to a quarter of its total deposits.
On Friday, the trading of the bank’s stock was stopped, and SVB tried to sell itself. The regulators stepped in and shut the bank.
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