The 2023 banking crisis in the United States was the second, third, and fourth largest bank failures in the United States, following the 2008 financial crisis. First Republic Bank, Silicon Valley Bank, and Signature Bank collapsed, respectively. However, the first bank to fail was Silvergate Bank in La Jolla, California, which primarily served clients in the digital asset industry, leading many to call it a “crypto bank.”
In a new bankruptcy filing, the executive in charge of winding down the holding company of shuttered Silvergate Bank claims that despite the crypto industry’s decline and rising interest rates, the bank “…was stable, able to meet regulatory capital requirements, and able to continue to service customers who had deposits with Silvergate Bank.”
However, in 2023, “sudden regulatory changes” from agencies including the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (OCC) “made it clear that beginning at least in the first quarter of 2023,[the agencies]would not tolerate a bank with a significant concentration of digital asset customers, ultimately making Silvergate Bank unable to continue its digital asset-focused business model,” the filing states.
The Fall of Silvergate: Timeline
Elaine Hetrick, Silvergate Capital Corporation’s chief administrative officer, laid out a chain of events that led to Silvergate Bank’s closure on March 8, 2023, two days before Silicon Valley Bank’s closure and four days before regulators seized Signature Bank.
According to Hetrick, serving cryptocurrency customers has helped the relatively small bank grow significantly in size, with “deposits growing from $1.8 billion at the end of 2019 to about $14.3 billion at the end of 2021,” and crypto customers accounting for “almost all” of the bank’s non-interest-bearing deposits (such as checking accounts) by the end of 2021 and the first half of 2022.
However, the notable collapse of the cryptocurrency industry in 2022, from Three Arrows Capital to FTX, led to a decline in deposits and even bank raids that Silvergate was able to manage by selling off long-dated bond investments at significant losses. As a result, “Silvergate’s consolidated business reported a net loss of $948.7 million for the year ended December 31, 2022, compared to net income of $75.5 million for the year ended December 31, 2021, primarily due to the sale of long-dated securities that were impaired due to rising interest rates,” the filing states. However, as the bank scaled back to continue operations, “…it still had assets in excess of deposits and met regulatory capital requirements,” the filing states in early 2023.
However, there was a submission that in early 2023, there was an “inflection point” in the bank’s business model as regulatory attention grew. Notably, two statements from federal banking agencies, including the Federal Reserve, the FDIC, and the OCC, cited “significant safety and soundness concerns” regarding the bank’s business model’s heavy exposure to the cryptocurrency sector and the liquidity risks it faced from primarily serving customers involved in cryptocurrencies.
As pressure from regulators mounted on banks serving cryptocurrency clients, Silvergate was eventually forced to consider one of three options: reorganize its business away from cryptocurrency clients, sell it as a going concern, or scale back its operations. According to the filing, after careful analysis, bank management concluded that reorganizing and selling the business would be too costly, and announced its intention to scale back the bank on March 8, 2023, making it the first mid-sized bank to do so in 2023.
“Despite the unprecedented combination of industry and regulatory pressures, Silvergate Bank did not fail,” the filing argues. However, the changing regulatory pressures would have made it impossible for it to continue its cryptocurrency-focused business, similar to the closure of Signature Bank. The closure of Signature Bank “…is a telling example of the intense regulatory pressures that banks faced in the digital asset industry at the time,” the filing states.
Next Steps
Silvergate’s parent company has enough cash to settle several lawsuits related to Silvergate’s compliance with anti-money laundering procedures and monitoring of transactions, and the bank expects to repay bondholders in full. The company currently has $163.1 million in cash and equivalent assets and does not expect to repay common stockholders.
Law360 reports that the bank is suing activist investors seeking seats on the debtor’s board to secure payments to shareholders who would otherwise receive nothing under the plan.
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