As an entrepreneur, I've had my fair share of experiences with banks, and unfortunately, it's not getting any easier in today's rapidly changing world.
That's why regional banking sector relationships are more crucial than ever, especially in the web3 space.
In this article, I want to talk about bank runs and how you can take control of your financial future amidst the country's bank crisis.
Silvergate Bank's Dissolution and Silicon Valley Bank's Withdrawal Requests: The Need for Financial Protection
Let's start with Silvergate Bank. It's known as a crypto bank, but it also does much more than just crypto.
Recently, they missed a deadline to file an important document.
Their stock tumbled over 80% at one point, leading to the FDIC stepping in and the bank going into an agreed-upon dissolution process.
Depositors were able to get their money back, but this is where things get interesting.
Fast forward a few days, and the depositors at Silicon Valley Bank started to get spooked.
Silicon Valley Bank (SVB Financial Group) is the 16th biggest bank in the United States, with a fantastic global brand and locations all around the world.
Silicon Valley Bank's known for financing the most innovative companies in the world, including some of the biggest names in tech like Coinbase and Airbnb.
Over 37,000 accounts and $200 billion worth of deposits in Silicon Valley Bank were at risk as deposit withdrawal requests totaling over $45 billion flooded in within a 48-hour period.
Bank Runs: A Wake-up Call for Depositors
If you've seen the movie "It's a Wonderful Life," you'll know that a bank run is essentially a panic where everyone tries to withdraw their money at the same time.
And while depositors were able to get their money back in the case of Silicon Valley Bank, this is a wake-up call for all of us to take control of our financial future.
Banking relationships are crucial, but we also need to have a plan B and diversify our assets outside of the traditional banking sector.
The way these banks work is simple.
- Banks take money from one person and lend it to another.
- For instance, they take money from Joe and lend it to Bob, so he can buy a house.
- The bank then takes the money from Bob and lends it to Alice so she can start a business.
This is basic banking, and we have trusted banking regulators with our hard-earned money for most of human history.
The 2008 Financial Crisis and the Fragility of the Banking System
However, this trust was shattered during the 2008 financial crisis.
Banks became greedy and started playing with complicated financial products like derivatives, mortgage-backed securities, and credit default swaps.
It turned out that people's money wasn't actually there, and banks didn't have the proper reserves.
These mortgage-backed securities weren't worth the paper they were written on, and people couldn't afford to pay their mortgages.
The situation that Signature Bank, Silicon Valley Bank, and Silvergate are in now is not too different from that. In 2021, the Federal Reserve's Jerome Powell stated that inflation was transitory.
Banks started buying up a whole bunch of Treasuries or fixed-income assets, including mortgage-backed securities that paid 1.5% to 1.6% interest, and these were long-duration assets.
The duration of these assets was 10 plus years, and if you held them for 10 plus years, you would earn the interest on that particular asset.
Banks' Asset Allocation and the Problem of Rising Interest Rates
Now, as we know, interest rates have risen considerably.
Jerome Powell has raised interest rates above 5%. Could they get to 6%?
There's a lot of speculation about where interest rates are going to land.
But the point is, if you have cash sitting in an account right now, you're better off holding a Treasury.
A six-month Treasury, where you're going to earn a much more attractive yield of 4% or 5%, than you would if you just kept it in a checking account.
This has created a problem for banks.
They took the discretionary cash that they had, which ballooned in 2020 and 2021, and started buying these fixed-income assets.
Of course, when $45 billion in withdrawal requests came, they were forced to sell a lot of these assets at a loss, thus creating a hole in their balance sheet.
They took over $1.8 billion in losses. Now, if they sell the rest of the balance sheet, the losses would be something more like $15 to $20 billion.
FDIC and Government Guarantees: Are They Enough to Ensure Depositors' Safety?
The story doesn't end there.
We saw a similar reaction to another bank, Signature Bank of New York.
Signature Bank of New York experienced unprecedented withdrawal demand, and we saw the New York State Department of Financial Services actually step in and shut that down.
This was likely a surprise to the FDIC, which is supposed to be there to guarantee accounts and step in when necessary.
But the government is now in charge of coming up with Signature Bank's depositors' capital.
Late Sunday night, the Federal Reserve and the Treasury, in a joint statement, said that the financial system is safe and sound.
They will guarantee the deposits at Silicon Valley Bank. They will do the same for Signature Bank.
They also mentioned that they are going to create an emergency fund for other banks that need additional liquidity to shore up their balance sheets in case lots of withdrawal requests come in that they're going to be able to meet that demand.
The Rise of Bank Runs and Capital Flight to Tier-One Banks
There are bank runs happening in the country, with massive capital flights leaving regional banks and going to tier-one banks like Bank of America, JPMorgan Chase, and Wells Fargo.
This is causing chaos and stress, and people are understandably worried about the safety of their money.
The situation is a bit like the Stanford Prisoner's Dilemma.
If everyone remains calm and doesn't rush to get their money back, then everyone will be okay.
But if half of the people panic and half remain calm, the panicked people are more likely to get their money back.
So, it's understandable that people want to do what's best for themselves and their families.
Protecting Your Money from Bank Crashes: The Importance of Asset Diversification
It's worth noting that the biggest companies in the crypto space, like Circle, Coinbase, Airbnb, and Roku, are not affected by this situation.
They will be able to get their cash and make payroll without issue.
However, it's important to be careful with where you deposit your money.
You need to know your bank and do your own due diligence on them, including checking their balance sheet to make sure they have cash available if people demand their money back.
Why Bitcoin and Gold Should Be Part of Your Plan B
The current banking system requires an unprecedented level of trust, which is difficult to maintain.
You have to trust central banks not to devalue your money, and you have to trust the central banks to be responsible for it.
But there's a breakdown in trust right now, and we need to find another way.
It's more important than ever to have some percentage of your assets in things like gold and Bitcoin, which will hold their value better than a centrally planned currency.
Securing Your Wealth in the Face of Bank Collapse: Why You Need Financial Sovereignty
We've seen currencies get devalued in developing countries such as Zimbabwe, Venezuela, Argentina, and Lebanon.
It can absolutely happen to the US dollar as well.
The level of backstopped guarantees for deposits is not sustainable without doubling the entire money supply, which would lead to a potential banking crisis.
We need to recognize that as individuals, we need financial sovereignty.
This past weekend, many people panicked because they didn't know what was going to happen on Monday morning.
It wasn't until Sunday night that we saw the joint announcement from the Treasury and the Fed about their plan.
This situation is a wake-up call, and we need to take action to protect ourselves and our families.
What if we didn't have to wait for the Federal Reserve or the Treasury to take action?
What if we didn't have to wait for a joint statement on what they're going to do, but instead took matters into our own hands?
What if we didn't have to wait until Monday morning when the banks open to have access to our hard-earned capital?
Taking Responsibility for Your Financial Future Amidst Banking System Collapse
My recommendation is that each and every one of you should plan for financial sovereignty.
You need to have a plan B and some percentage of your assets outside of US dollars and the US banking system.
Assets like gold, ideally physical gold that you can put in a place that's safe and that you trust.
You also need Bitcoin that you self-custody, that you know where it is, that you have access to 24/7/365, and that you can take with you if needed.
With US banks experiencing a sharp decline in stock prices and financial bleeding happening in real-time, it's time to ask the tough questions:
Are the largest banks, like the big four banks too big to fail, and are they really safe?
It's crucial that we take responsibility for our own financial futures and educate ourselves on the options available to protect our assets.
As Bitcoin and gold rally in the wake of these events, it's clear that people are actively seeking alternatives to the traditional fractional reserve banking system.
Let's take action and safeguard our financial security today.
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