Financial institutions linked to innovative and forward-thinking sectors of the economy have encountered significant difficulties this week. Silvergate Capital, a holding company for a bank that made a big bet on servicing the emerging crypto economy, has revealed that it will wind down bank operations. Meanwhile, Silicon Valley Bank (SVB), which has played a similar role in managing money for venture capital-funded startups, was closed by state regulators on Friday.
Both banks experienced classic bank runs as their customers, such as crypto exchanges or tech startups, faced business challenges that led to decreasing deposits and increasing cash withdrawals. This created a situation where they had to sell backing assets at significant losses. Fed rate hikes, coupled with real business cycle issues, including COVID-driven disruptions, were the upstream sources of these problems. Rising yields on U.S. Treasuries were crowding out new investments in high-risk sectors like tech and crypto.