There was a small, seemingly ordinary bank with a few branches around San Diego, CA. Some manager there had the idea of encouraging crypto activity--opening accounts for entities that were promoting or investing in crypto. Almost all other banks wanted to steer clear of this business--for multiple reasons. But this strategy worked like Gangbusters in helping the tiny bank expand.
Later, of course, Crypto went downhill in 2022. SBF put his smiling face all over, having made billions of dollars disappear. So, that little bank went down the drain in early 2023. A very minor event in US financial history. Far larger forces were at work: the Fed doubling interest rates.
Real interest rates (nominal interest, minus inflation) had been near zero for ten years. But now the Fed jacked them up. That's because Biden had handed out so much money that he created record-breaking inflation--even though real economic activity had been contracting because of the pandemic. This was an over correction.
It turned out that, according to official reports, a significant fraction of the handouts had accumulated in the hands of fraudsters--who surely inflated the prices of luxury goods and expensive real estate. Growing inflation tends to increase and can be catastrophic, destroying the value of money and other assets. That has happened in a number of countries.
In our times, the one and only textbook method for reducing inflation is to increase interest rates. The Fed has the means to do this, it can double them, or more. So, the value of assets paying fixed interest goes down. Those who have borrowed money at adjustable rates, for instance on mortgages, now have much higher payments to make. Unsurprisingly, this can lead to people and companies going broke.
Even banks. In this instance, Silicon Valley Bank, also in California. The second-largest bank failure in US history, after WAMU (which had bought the company I founded). This was precipitated by a bank run--depositors seeking to take their money out.
Depositors had a good reason to run. Their deposits are insured by the FDIC only up to $250,000. Above that--some Silicon Valley depositors may get some more of their money back years later, when the bank's liquidation is completed. The bank had 2500 venture capital firms--and, supposedly, half of all tech ventures--as customers. It had, with incredible foolishness, maintained its investment in Government bonds even after the Fed said it would go on raising interest rates. The bonds dropped in value and had to be sold when customers wanted to get their money out. Some of these ventures and venture capital companies may lose a lot of money. They were already doing badly in 2022-3.
The venture and small-tech sector constitutes a very small element of the total US economy. 2023 adversities are unlikely to impinge directly on mainstream institutions. But this sector is widely thought to supply the cutting edge for the nation's efforts to maintain superiority in innovation, to stay ahead of China and the rest. We'll see.