Premarket Stocks: Bank chaos has been bittersweet for crypto and wine

New York (CNN) Silicon Valley Bank’s collapse earlier this month dealt a major blow to the wine and crypto companies that trusted their money and depended on the lender to stay afloat.

But it also gave the fine wine and crypto industries a big boost as panicked investors rushed out of the financial sector and into alternative assets.

Bittersweet banking services: SVB has lent over $4 billion to winery customers since 1994, with over 400 wine industry customers (including vineyards, wineries and suppliers) working with the bank’s premium wine division, according to the bank’s website.

Recent SEC filings, meanwhile, indicated that SVB had about $1.2 billion in outstanding loans to high-end wine customers when the bank collapsed. Those wineries will be able to get their money back, but what happens to their lines of credit remains uncertain as the details of the bank’s sale to First Citizens BancShares are hammered out.

SVB also had deep ties to the crypto industry. Circle, the company behind popular stablecoin USDC, said it had about $3.3 billion of its $40 billion in reserves with SVB. The firm’s USDC coin plunged in value on the news that the bank had failed, although it has since recovered.

The collapse of Signature Bank, a major crypto lender, also had serious implications for the industry. The Federal Deposit Insurance Corporation (FDIC) recently told the bank’s crypto customers that they must close their accounts and move their money by April 5, as the deposits were not included in the bailout deal arranged with Flagstar Bank this month.

Still, Bitcoin rose more than 4% on Wednesday, marking its best performance in over a week. The coin is up 23% this month. A single coin now costs more than $28,000 – the highest level since last spring.

That’s because investors are concerned about the safety of the U.S. banking system and are looking for a way to protect their money outside of it, crypto advocates said.

“Bitcoin and other cryptocurrencies are built on a blockchain in a decentralized structure that is not controlled by just one entity,” said Karan Malik, head of Web3 Strategy at Legacy Suite. “The argument for decentralization and adoption of cryptocurrency has become more valid after the collapse of the banks.”

Cathie Wood, founder of Ark Investment Management, said in a tweet that the rise in crypto is not surprising. “Their blockchains are decentralized, transparent and auditable. Banks are not, and in recent days have become less so.” she said.

Investments in fine wines have also increased as investor confidence in the banking system has been shaken.

“Fine wine’s performance across various market backgrounds demonstrates its ability to generate alpha and enhance risk-adjusted returns in a diversified portfolio due to its stability and low correlation with the stock market,” said CEO and co-founder of Cult Wine Investment Tom Gearing.

The Knight Frank Wealth Report, an annual analysis by the property consultancy, found that 39% of ultra-high net worth individuals are likely to invest in wine this year.

“Interest in alternatives is on the rise and will be where wealth grows over the coming decade,” the report said.

Other safe haven investments such as gold jumped in the wake of SVBs and Signature Bank’s collapse. Spot gold is now up 7.4% for the month, although it has flattened in recent days. Silver is up 11% for the month.

What will be next: The market realizes that we’re “going into a credit downturn and an earnings downturn and the recession that will lead to the default cycle. We’re in the middle of that,” Mark Connors, head of research at digital asset management firm 3iQ, said in a note. “So when that happens, what assets are you going to go to?” he asked. “The 10 years [Treasury] is up, gold is up, the yen is up – and Bitcoin is up.”

So will the rise in alternative investments last?

Goldman Sachs estimated this week that households will be net sellers of $750 billion in stocks in 2023 and that companies will buy a net $350 billion in stocks in 2023, down 47% from 2022. That money has to go somewhere.

But the federal government, the FDIC and the Federal Reserve Bank have been working around the clock to assure investors and customers that the US financial system is safe. Alternative investments in crypto, wine and metals, meanwhile, come with their own volatility and risk.

The Fed was without supervisory leadership when SVB’s business strategy went awry

The Federal Reserve went without a supervisor for nine months between the fall of 2021 and the summer of 2022 — the same period when Silicon Valley Bank’s “business strategy went wrong,” according to U.S. Representative French Hill, a Republican from Arkansas, on Wednesday.

The Fed’s current deputy chairman for oversight is Michael Barr, who was sworn into the role in July 2022 to replace Randal Quarles after he left the post in October 2021. Barr told the House Financial Services Committee on Wednesday that he is unsure what happened and who was responsible for supervision during the nine-month interim period.

“I’m sorry, I don’t know the technical answer to that question,” Barr said when asked who was supervising banks during that time.

President Joe Biden failed to immediately nominate a replacement for Quarles, and the Fed did not have a plan to replace him in the meantime, Peter Conti-Brown — a professor at The Wharton School at the University of Pennsylvania and a Brookings Fellow — wrote shortly after Quarles’ term ended. Instead, the Fed’s key supervisory and regulatory priorities were “managed by the Fed’s board through their committee structure,” Conti-Brown said.

Biden eventually nominated former Fed governor and Treasury Secretary Sarah Bloom Raskin for the role, but withdrew her name from consideration after she was caught up in a controversy involving a Colorado financial technology company. Biden ultimately nominated Barr in May 2022.

“It looks like we have a lack of supervisory urgency here,” Hill said, noting that it took a full 12 months between when trends in banking activities sparked concern among Federal Reserve examiners and when action was taken to correct them .

During that period without a head of supervision, Conti-Brown wrote, financial regulation and supervision were likely not at the forefront of the Fed’s policymaking.

“I think you raise an absolutely essential question. That’s one of the things we’re going to ask about in our review,” Barr told the Hill. “Should the supervisors have been much more aggressive in the way they responded to the risks that they noted? That is something we will have to look at.”

Failure of bank management, supervisory authorities and regulatory system led to SVB collapse: Top Fed official

The collapse of Silicon Valley Bank and Signature Bank has caused weeks of turmoil and fear in the US financial system. On Wednesday, the House Financial Services Committee used its hearing to try to figure out what went wrong.

According to Barr, there were several reasons.

“I think any time you have a bank failure like this, bank management has clearly failed, regulators have failed and our regulatory system has failed,” Barr said at the hearing. “So we’re looking at all of this.”