Hello. This is my first post here, and I planned it to be about "how I got into Bitcoin, and discovered cryptocurrencies as well as defi". However, that had to be changed with all the recent tensions of these past weeks, especially the last few days, regarding Silvergate Capital Corp. (SI) and Silicon Valley Bank (SVB). The failure of both banks, with even one coming under the receivership of the FDIC.
Before we begin, let us go back to 2008 and the GFC, at the time we were told that banks like Lehman Brothers failed because they made bad investments or loans, in particular sub-prime MBS (mortgage-backed securities), which went bad and lost value, making the banks holding them "insolvent". Therefore after that, financial institutions and banks became more reluctant to invest and make loans on things that are perceived to be 'risky', and are more attracted to invest and buy things like US government bonds, because who is more stable and safer than 'Uncle Sam'.
SI and SVB are no different from the other banks, and supposedly, had most of their bank assets (funded from their customer deposit liabilities) in US treasury bills. And that US treasury bonds are deemed to be so safe, that when these banks compute their capital adequacy ratios, the risk weights assigned to them are zero or close to it.
Fast forward to the present, due to tensions regarding US government investigations of SI and its involvement with FTX and Alameda Research, there were consequently 'bank-runs' on both SI and SVB by their own depositors and investors. Leading to SI "voluntarily" declaring its own liquidation, and SVB being placed under FDIC receivership after the recommendations of its bank regulators.
To recall the circulating justification, more or less, of the administration and media back in 2008, on the reason why the banks that failed were 'bailed-out'. It was because, that the US Federal Reserve or US central bank is the "lender of last resort".
One of the ways that banks are assisted by the US Fed during bank runs, was through the latter's repurchase facility, where banks are able to get short-term borrowing from the Fed, when there are no other lenders who are willing to lend to them. Hence, the phrase "lender of last resort". And, guess what is the primary collateral to avail of these "repo" facilities from the Fed by the banks… hold on to your hats… US treasury bonds. The huge amounts of assets that SI and SVB, are supposed to be sitting on.
So, why didn't SI and SVB availed of these "repo" facilities from the Fed, to 'counter' their bank runs? Was there something that made them unable to or disqualified them to avail of the facilities from the Fed?
