A busted banking system 📉

“To contract new debts is not the way to pay old ones.”

— George Washington

👋 Friends, Rallie here. The newsletter keeping it together by breaking things down. Things = crypto, finance, and tech.

On the menu:

• 🆘 A busted banking system

• 🗞️ Headlines that hit

• 📚 Refresh: Insurance talk

• 💯 Top tweets

The Rallie Recap

🆘 Over the past several days, we saw the second and third largest bank failures in US history. So what happened? Let's dive in:

• Last Thursday, we wrote about how Silicon Valley Bank (SVB) was at the point of near collapse, and in a matter of about 30 hours, that collapse actually happened. On Friday, SVB went into receivership as the FDIC (Federal Deposit Insurance Corporation) took over the reigns.

• Summarized nicely by Billionaire investor, Bill Ackman, “Silicon Valley Bank senior management made a basic mistake. They invested short-term deposits in longer-term, fixed-rate assets."

• This led to mass panic among SVB clients (which banks 50% of venture-backed tech startups in the US 🤯), who were told they would only be getting back $250K USD each, as that's the max insured amount per account by the FDIC.

• This was a big problem as only 2.7% of SVB deposits were less than $250K—a shocking 97%+ were not FDIC insured. Meaning tech companies across the US would have barely any funds to keep operating, make payroll, etc...

• At the same time, industry experts were also sounding the alarm that there would be bank runs everywhere come Monday (especially with smaller regional banks) unless the FDIC did a system-wide guarantee.

• And then another bank failed. On Sunday, crypto-friendly Signature Bank, also shutdown suddenly, marking the third-biggest bank failure in U.S. history...just two days after the collapse of Silicon Valley Bank.

• So later that night, as many were hoping, the gov came through with a bailout. The Treasury, Federal Reserve and FDIC released a joint statement announcing that they would be insuring 100% of SVB and Signature Bank deposits, with full access to funds on Monday morning. They also announced they would create a Bank Term Funding Program (BTFP). And by doing so, essentially stopped the potential bank-run-contagion by protecting deposits.

• Since then, the Fed and FDIC have signalled that they'll continue to backstop basically every bank's deposits. Which has many asking if any lessons were actually learned here...

• Fun fact: SVB's customer withdrawal made history with a whopping $42B USD being withdrawn last Thursday.

It's only Tuesday and this week has been a rollercoaster: Bank stocks sank and then rallied, Bitcoin hit a 9-month high, and now SVB is being investigated for insider trading. What could possibly be next?!

Headlines That Hit

• 📊 Circle, a peer-to-peer payments technology company that manages stablecoin USDC, had $3.3B of its USDC reserve deposit held at Silicon Valley Bank, causing the stablecoin to depeg over the weekend.

• 📉 Meta is saying buh-bye to NFTs and another 10,000 workers. Ouch.

• 🏁 The AI race continues. Google unveiled a flurry of artificial intelligence tools for its email and cloud software, scooping Microsoft just days before they're supposedly making a similar announcement.

• 🤖 Meanwhile, OpenAI just launched GPT-4: read this thread for all the deets.

Rallie Refresh: Insurance Talk

With the wild events of the last week, it's the perfect time to recap how your deposits are protected in Canada and the US. Let's goooooo! ....*attempts to make banking insurance chat more fun*

Starting with Canada, Canadians are protected by the CIDC (Canada Deposit Insurance Corporation):

• The CIDC is an independent agency created by the Canadian government in 1967.

• The main purpose of CIDC is to protect eligible deposits in case a member financial institution fails. Eligible deposits include savings accounts, chequing accounts, GICs, and other deposits.

• The current deposit insurance coverage limit is $100K CAD per depositor per member institution. So if you have deposits at more than one member institution, your total coverage limit could be higher.

• CIDC covers all federally regulated financial institutions in Canada, including banks, trust and loan companies, and credit unions that are members of CIDC.

• CIDC does not cover investments like stocks, bonds, or mutual funds. It only covers eligible deposits up to the coverage limit.

And in the US, Americans are protected by the FDIC (Federal Deposit Insurance Corporation):

• The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the federal government that was created in 1933 in response to the bank failures of the Great Depression.

• The FDIC's main purpose is to protect consumers' deposits in case their bank fails by providing deposit insurance to customers of FDIC-insured banks.

• The insurance covers deposits of up to $250K USD per depositor, per bank. This means that if your bank fails, deposits of up to $250K USD are protected.

• The FDIC does not insure investments such as stocks, bonds, mutual funds, or annuities.

• The FDIC is funded by premiums paid by FDIC-insured banks, not by taxpayer dollars. Banks pay into the insurance fund based on their level of risk.

• If a depositor has more than $250K USD in deposits at one bank, they can still be protected by the FDIC by opening accounts in different ownership categories, such as individual accounts, joint accounts, and trust accounts.

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That's all for today. Stay hungry & we'll catch you next time. ✌️

DISCLAIMER: This is not financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions.