Duration, crypto exposureI decided to respond to Rogueecon in a new post because I'm getting questions about the current purge going on right now in Venezuela.
Yes Rogueecon, I have subsequently learned through watching Bloomberg that regional banks had very high "duration" exposure. Investopedia defines duration as: "Duration is a measurement of a bond's interest rate risk that considers a bond's maturity, yield, coupon and call features. These many factors are calculated into one number that measures how sensitive a bond's value may be to interest rate changes."
So when depositors started withdrawing more money than anticipated banks such as Silvergate, SVB, Signature etc could not borrow to redeem the deposits because the value of their capital structure had been degraded too much.
What caused the initial run on banks? I'll preface this part by noting that I am simply repeating what reknowned, exiled in Miami, Venezuelan journalist Rafael Poleo, wrote yesterday.
He said that the local "Oilygarchs" to use Dfly's term came across billions of dollars which they converted into crypto through exchanges in the US. The exchanges have accounts in Silvergate et al. When owners of crypto want to convert back to USD the exchanges transfer USD from their bank accounts to the crypto owners account.
For some reason there was a massive demand for exchanging crypto back to USD a couple of weeks ago causing a run on Silvergate, SVB etc. Poleo says that the cause of the run was some fear that the US Treasury was about to go after the oilygarchs.
Arrest warrants issued by the US have been issued for some time now for some of the most powerful oilygarchs who have been protected by the state here. But now the state is actively arresting them in a purge. Dozens arrested just yesterday. Hundreds fleeing the country leaving mansions, estates, yachts etc behind. Some sort of internal power struggle is going on.
Poleo says that pressure is being put on by the US to either get the current government to cede power or that the current government changes its economic model. The implicit warning by the US is that they know where the oilygarchs' money is and they will leave the oilygarchs pennyless if they don't surrender to US wishes. Poleo says thar through his sources he identified $38 billion so far of crypto losses suffered by the oilygarchs because the crypto exchanges can't redeem the crypto into dollars because their bank accounts no longer exist because the banks no longer exist.
OK, so I'm not going to repeat all of the conspiracy theories flying around here but the facts are clear. 1) A massive purge is underway in Venezuela. Jorge Rodriguez whose sister is Vice President said yesterday that the "purge is just getting started". 2) Tens of billions of crypto assets have been completely wiped out. The dollars used to buy the crypto still exist in the form of bonds, mortgages, loans and other assets held by the crypto banks now in liquidation.
So however people want to connect the dots, Powell's aggressive actions to raise rates together with geopolitical dynamics in this part of the world causing a run on crypto banks created the conditions for crypto banks to go under.