Why Do The Same Banks Keep Falling?

In the wake of Credit Suisse’s crisis, Changpeng Zhao, the CEO of Binance, in a tweet on March 20, questioned the constant failures of banks and the regular, yet costly, need to bail them out using taxpayer’s monies.

Binance CEO Questions The Banking Crisis In The United States

Banks are often portrayed as safe, yet they are not immune to failure. This happens when they can no longer meet their obligations, cracking whenever there are bank runs, as was recently observed with Silicon Valley Bank (SVB). 

According to the Binance CEO, the same banks keep failing, triggering a crisis, which leads to a costly bailout process, often using taxpayers’ money to maintain trust in the financial system. While this happens, the CEO observed that it is incredibly harder for new banks with better ideas to get approved by the Federal Reserve, the United States central bank. 

Every decade or so, the same banks fail. We keep them alive, then repeat. More costly each time.

Meanwhile, it is incredibly difficult for new banks (to be approved) to enter the market to compete. New banks are also required to operate in exactly the same way as the old… https://t.co/fQsF7ibMrT

— CZ 🔶 Binance (@cz_binance) March 20, 2023

CZ’s criticism shows the need for innovation and competition in the banking sector. The difficulty for new banks to enter the market and the requirement to operate like failing banks run contrary to the principles of a “free market.” It also prevents new and innovative ideas from entering the market, which can lead to better services for customers.

His tweet came after the Credit Suisse and UBS Group merger announcement. The merger is set to wipe out Credit Suisse’s additional tier 1 bonds (AT1 bonds) worth over $17 billion.

JP Morgan believes this would have a ripple effect on investors and the financial market, warning that it could lead to a contagion effect across the sector. According to JP Morgan, the cost of AT1 bonds is expected to experience an exponential increase in double digits.

JP Morgan: decision to write down #CreditSuisse #AT1bonds could lead to contagion for wholesale funding costs across the sector
– Cost of at1 issuance could move up “materially”, potentially rise into double digits – @reuters #bonds #banks #markets #funding

— Global Markets Forum (@ReutersGMF) March 20, 2023

The Federal Reserve Board of Governors denied Custodia, a Wyoming chartered special purpose depository institution (SPDI), a license. Custodia is a cryptocurrency-friendly bank, and the Federal Reserve, in its ruling, said crypto-related activities were not consistent with the business of banking. Accordingly, Custodia couldn’t be regulated by the central bank.

Crypto Prices Rally

The recent collapse of Silicon Valley Bank has also raised concerns about the United States banking system’s stability. However, while there is a crisis in traditional finance, the crypto market has been rallying, with the Bitcoin price reaching a new nine-month high of $28,000 ahead of the US Federal Reserve’s Federal Open Market Committee (FOMC) meeting. The rally coincides with Binance announcing their liquidation of the $1 billion Industry Recovery Fund and purchase of, among other coins, Bitcoin.

The crypto financial market has been evolving rapidly in recent years, with new technologies and platforms, mainly in decentralized finance (DeFi), spearheading the revolution. 

Feature Image From Canva, Chart From TradingView