3 - 4 minute read
Sen. Elizabeth Warren and Congresswoman Alexandria Ocasio-Cortez have sent letters to bankrupt crypto lender BlockFi and stablecoin issuer Circle asking why they banked at Silicon Valley Bank (SVB). The lawmakers are asking questions to understand the “mutual backscratching dynamic” between SVB and venture capitalists that could have led to massive uninsured deposits at SVB, leading to its ultimate collapse.
Silicon Valley Bank, the bank favored by venture capitalists, provided high-rolling depositors with “white glove” services like exclusive lines of credit, ski trips, conferences, and fancy dinners, which is being questioned by Senators Warren and Ocasio-Cortez. The two lawmakers are raising concerns regarding the massive uninsured deposits held by crypto companies like Circle and BlockFi at SVB, which ultimately forced federal regulators to spend $20 billion to stop withdrawals when the bank collapsed after a $42 billion single-day run last month.
The senators have sent letters out to BlockFi and Circle to understand the history of their relationships with SVB and how much money they deposited and maintained at the bank, investment relationships between SVB and their related entities, any alleged “coddling” of their executives or board members by SVB, and whether any of their executives raised red flags over SVB’s exposure to uninsured assets.
Sen. Elizabeth Warren and Congresswoman Alexandria Ocasio-Cortez suggest that the “mutual backscratching dynamic” between SVB and venture capitalists could explain why some customers placed massive, uninsured deposits at SVB. The lawmakers are asking for information to understand whether BlockFi and Circle had any investment relationships with SVB and their related entities.
The regulators spent $20 billion to halt the flow of withdrawals from SVB when it collapsed after a $42 billion single-day run last month. The senators are keen to understand the history of the relationships between the firms, their executives, and SVB.
The inquiry by Senators Warren and Ocasio-Cortez could trigger investigations into the crypto industry by regulators. In line with this, investors should be careful with who they bank with and should ask questions regarding the stability of the financial institutions they work with.
Traders must also look into the liquidity of the financial institutions they use and avoid putting large amounts of money in uninsured deposits. As the situation with SVB showed, the sudden collapse of a bank can lead to investors losing large amounts of money.
The Bottom Line
The collapse of Silicon Valley Bank and the inquiry by Senators Warren and Ocasio-Cortez sheds light on the importance of the stability and liquidity of institutions for investors. In light of this incident, traders must do due diligence on the financial institutions they choose to work with to avoid monetary losses.