Silicon Valley Bank crisis highlights need to unbundle payments from banking

Fintech clients face risks with concentration in too-big-to-fail banks

The recent collapse of Silicon Valley Bank has shed light on the concentration risk in the American banking sector. The bank, with over 2,500 fintech clients relying on it for payment rails, has raised concerns about the systemic implications of a large bank failure. Circle, issuer of the digital dollar USDC, had a substantial $3.3 billion deposit balance with SVB before its troubles.

Transfer of funds to G-SIBs poses risks to financial system

Following the collapse of SVB, funds from Circle and other clients were transferred to global systemically important banks (G-SIBs). These banks operate on a fractional-reserve model, thereby amplifying potential risks to the financial system. Regulators have broadened their tacit guarantee for deposits within the banking sector, potentially concentrating financial risks.

Broadening access to payment rails could mitigate too-big-to-fail risks

The trajectory of the financial system is toward concentrating risks in the largest banks and ballooning the Federal Reserve’s balance sheet. To mitigate too-big-to-fail risks, regulators are considering broadening access to payment rails such as Fedwire services and FedNow system to regulated nonbank financial entities and payment service providers. This move could lessen the volume of physical currency in circulation and diversify risk away from too-big-to-fail financial institutions.

Silicon Valley Bank crisis leads to higher savings rates at some banks

The SVB crisis also caused concerns about maintaining deposit levels at some banks. To incentivize customers to stay put or attract new money for replenishing reserves, some banks lifted their savings account and CD rates. For example, Ally Bank increased its 11-month no-penalty CD rate from 4% to 4.75% just after the bank’s failure. During the week that SVB and Signature failed, regional and smaller banks lost $119 billion in deposits while the 25 largest banks gained $67 billion in deposits.

EntreBank establishes itself as a new bank despite rising interest rates

EntreBank is the first new bank to be established from scratch in 13 years. Five veterans in the local banking industry formed EntreBank a year ago, surpassing growth goals for its first year. Despite recent turmoil, deposits in EntreBank have risen by 20%. Clients prefer to move to EntreBank as it does not have legacy investment portfolio issues. Unlike troubled banks such as Silicon Valley Bank and Signature, EntreBank’s liquidity is not a problem since it can readily access its depositors’ money.

Entrebank’s growth model prioritizes staying liquid and avoiding market risk

Unlike SVB and Signature, EntreBank invested its depositors’ money in the shortest-term, most liquid investments available to banks – the overnight account of the Federal Reserve. The bank’s mentality is to stay very liquid and avoid market risk with its investment portfolio. EntreBank has a stable depositor base and brought in businesses that its core group has worked with for over two decades. Its business model and capital structure are sound.

As regulators consider unbundling payments from banking further, the establishment of new banks like EntreBank demonstrates how innovative business models can emerge with liquidity management prioritized, increasing financial stability.

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