Understanding the “Bank Run” from the Last Week of FTX’s Life

1. The Financial Times has just disclosed a balance sheet that is allegedly from FTX’s last moments, and it looks like SBF is showing FTX’s financial situation to potential investors (Figure 1).

This balance sheet not only shows what FTX looked like in the final seconds before Chapter 11’s bankruptcy, but also shows how FTX has suddenly fallen into an abyss of no return since last weekend.

It can be said that this balance sheet is a perfect "banking crisis" textbook.

2. Let’s first look at the balance sheet of FTX before the run (last Saturday)

At that time, FTX had total assets worth approximately US$24 billion.

Among them, there are about 6 billion in liquid assets, including various stablecoins, deposits in various currencies, and Robinhood stocks. In addition, it holds about 15 billion in various crypto assets, which are marked as "less liquid assets" by SBF, including 6 billion of its own FTT, 2.2 billion SOL, and 5.4 billion SRM.

Finally, there are 3.2 billion illiquid assets, mainly various venture investments.

Some people speculate that the reason why FTX holds so many SBF-related assets (SOL, FTT, SRM) is because SBF uses customers' funds placed in FTX to control its own related assets.

Others speculate that FTX provided loans to Alameda using FTT, SOL, SRM and other tokens as collateral, and that these tokens on the balance sheet are actually consolidated statements of FTX and Alameda (SBF stated in this balance sheet that FTX provided Alameda with approximately $8 billion in loans).

From the liability side, FTX had approximately $14 billion in liabilities last Saturday, including at least $5 billion in U.S. dollar or U.S. dollar stablecoin liabilities, as well as a large amount of BTC and ETH liabilities.

At this time, FTX's net capital (total assets minus liabilities) was approximately $10 billion.

In other words, before last Saturday, FTX's leverage ratio was only 1.4 times, and SBF was indeed a billionaire last Saturday (Figure 2).

3. Let’s take a look at FTX’s liquidity status last Saturday.

SBF estimates that FTX’s daily withdrawals average $250 million per day on weekdays.

Therefore, even if there is no new capital inflow, SBF expects its 6 billion liquid assets to be able to withstand approximately 24 days of withdrawal demand (similar to the concept of "liquidity coverage multiple" in traditional banking), which will give FTX sufficient time to liquidate the various tokens it holds or find funds from other places.

4. But the run that started on Sunday was beyond SBF’s imagination

SBF stated in the document that on Sunday (November 6), FTX encountered 25 times the withdrawal demand of a normal day, and the net outflow of funds reached US$5 billion in just a few days, including at least 20,000 BTC and a large number of stablecoins.

As a result of the run, the total amount of FTX’s liquid assets dropped from 6 billion to only 1 billion (it is not clear whether the 5 billion flowed out on Sunday or accumulated from Sunday to Wednesday).

At this time, FTX's 1 billion liquidity reserves face a daily outflow pressure of 5 billion (of course it is impossible to sustain this much), and the coverage ratio will drop from 24 times (60/2.5) to 0.2 times (10/50).

In other words, it can only survive for a few hours if withdrawals are not suspended.

5. Along with the evaporation of liquidity, the prices of FTX-related assets also plummeted

It is unclear how much assets FTX itself has sold in the secondary market, but the prices of FTT, SRM, and SOL have fallen by about 90%, 60%, and 60%, respectively, since last week.

This caused the total market value of FTX’s less liquid assets to shrink by two-thirds, from $15 billion to $5 billion.

SBF did not make any impairment provisions for the illiquid assets it holds, but most of these assets are related to venture capital in the crypto field, and their market value is very difficult to estimate and may have shrunk significantly.

Therefore, after experiencing a bank run and asset impairment, FTX's assets and liabilities before bankruptcy were as follows: on the asset side, there were only 1 billion in liquid assets, 5 billion tokens, and illiquid assets with a book value of 3 billion but whose actual value was likely to be very low, while on the liability side, there were still liabilities worth about 9 billion US dollars, of which 5 billion were denominated in US dollars.

In other words, FTX is no longer just facing a liquidity crisis at this point, but a complete repayment crisis.

It is already insolvent (Figure 3).

6. The collapse of FTX in just a few days is a textbook case of a bank run. It presents almost all the characteristics of a bank run, especially an investment bank (dealer bank):

(1) It implements a large number of risk transformation and liquidity transformation functions, and uses customer funds for investment in high-risk and low-liquidity assets.

(2) The bank run pressure was completely underestimated, causing the seemingly ample liquidity reserves to be exhausted in just one or two days.

It should be pointed out that bank runs in the crypto asset sector are carried out entirely on-chain, so the pressure is far greater than that of the traditional banking system.

In the traditional commercial banking sector, a net outflow of 10% in deposits in one month is already a serious crisis (Figure 4). For investment banks, Lehman’s liquidity reserves plummeted by USD 40 billion in the week before its bankruptcy, accounting for about 8% of its total assets.

In the case of FTX, the net outflow of funds from the cryptocurrency exchange in a single day may be as high as 1/3 of the total liabilities.

This is an extremely terrifying liquidity pressure. It can be said that any financial institution that adopts partial liquidity reserves cannot be immune, let alone FTX, which has an aggressive style and is even involved in a Ponzi scheme.

(3) When the asset side is valued using the market value method, it is very easy to fall into a death spiral of bank run-dumping-asset price decline-equity decline-intensified bank run.

What’s even more barbaric about FTX is that it holds a large number of its own stocks, which is equivalent to a bank buying its own stocks and injecting capital into itself.

(4) The spread of news was extremely fast, and coupled with the extremely fragile market sentiment, it accelerated the collapse of the giant.

7. SBF has a good summary in this document:

There were many things I wish I could do differently than I did but the largest are presented by these two things: the poorly labeled internal bank-related account, and the size of customer withdrawals during a run on the bank

The translation is: There are two things I regret most: I should not have been so rough in conducting credit transactions with Alameda, and I should not have underestimated the liquidity pressure of a bank run.

8. FTX’s $20 billion bank run case deserves to be included in all monetary and banking textbooks.