In one week, three banks that played an important role in financing the startup economy collapsed. Two, Silicon Valley Bank and Signature Bank New York were closed by U.S. regulators, becoming the second and third biggest bank failures in history after Washington Mutual in 2008. Before them, Silvergate, a crypto bank was winding down its operations. The Common Denominator (besides the obvious flaws of the US banking system) - the lack of diversification. They made bets that went severely wrong. Silvergate bet everything on the emergence and success of the cryptocurrency industry. When a liquidity crunch hit the industry last May, followed a few months later by the sudden crash of cryptocurrency exchange FTX, Silvergate found itself in trouble. The bank was unable to survive these 2 events and was abandoned by the same clients whose development it had supported.

Silicon Valley Bank (SVB) was at the center of the ecosystem of startups and small businesses, wineries and farms in the San Francisco Bay Area. The bank was also present in eight other countries, Germany, Canada, China, Denmark, India, Israel, Sweden and the UK where it supported startups. SVB's assets made sense at the time, but when the Federal Reserve raised interest rates, the existing loans became less valuable. And what the government effectively did by raising interest rates was raising the cost of being a bank.

Signature Bank New York was closed because of its exposure to the cryptocurrency industry on which the bank also relied heavily. Regulators unveiled an emergency plan on March 12, the flagship measure of which is to guarantee deposits from all SVB and Signature Bank New York customers, to avoid contagion. But the question seems to be: Which one is next to collapse? There will be a few other banks that may have issues like SVB, but only a few. Govt actions should have removed the reasons for bank runs and the biggest banks in the US have much tougher regulation and stress testing.

All eyes are currently on First Republic Bank, the 13th largest US bank. The bank's stock was down 66% and speculation about a possible collapse is circulating on social networks. The bank has published a number of news releases to squash the rumors and reassure the public on its condition. The total available unused liquidity to fund operations is now more than $70 billion, the bank said on March 12. KeyCorp, the 20th largest U.S. bank, is also part of the conversation.

Let’s look at SVB and what it was that forced the collapse. The bank bought billions of dollars worth of bonds over the past couple of years, using customers deposits, nothing unusual for a bank. These investments are typically safe, but last year was the worst year on record for bonds. The value of those investments fell because they paid lower interest rates than what a comparable bond would pay if issued in today's higher interest rate environment. Bond issuers couldn’t keep up last year with the speed of interest rate hikes.

Typically that's still not an issue, because banks hold onto those for a long time — unless they have to sell them in an emergency. Silicon Valley's customers were largely startups and other tech-centric companies that needed more cash over the past year. Venture capital funding was drying up and companies were not able to get additional funding for their mostly unprofitable businesses. So Silicon Valley customers started withdrawing their deposits. SVB said that it needed to raise $2.25 billion of additional capital by issuing new common and convertible preferred shares because of that. a bank raising additional funds is a red flag and that decision caused a run on the bank. About $42 billion of deposits were withdrawn by the end of March 9. By the close of business that day, SVB had a negative cash balance of $958 million. Their customers were largely businesses and wealthy people and they were likely more fearful of a bank failure since their deposits were over $250,000 US, which is the U.S. government-imposed limit on deposit insurance.

That created the emergency for selling these typically safe bonds at a loss. This and the volume of withdrawals added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors, but was unable to find them.

Some will blame social media and the incredible speed of spreading bad news, some will blame the regulators, the Democrats will blame the Republicans and vice versa and some will blame greedy bank executives. All of this probably plays a role in this, but the fact is that SVB, a fancy tech-focused bank was brought down by the oldest issue in banking — a run on the bank.