In a recent bankruptcy filing, Silvergate Bank’s leadership has attributed the institution’s closure to a “sudden regulatory shift” from U.S. financial agencies. This development comes after the broader banking crisis that saw multiple high-profile bank failures, including Silicon Valley Bank and Signature Bank. Silvergate is often called a “crypto bank.” It was the first to collapse in this wave, shutting its doors on March 8, 2023.
Elaine Hetrick, Chief Administrative Officer of Silvergate Capital Corporation, communicated the conditions that contributed to the bank’s overnight end. According to Hetrick, the drop in the crypto market and the increase in interest rates have not affected Silvergate’s ability to stabilize and fulfill regulatory capital requirements. The bank could carry on serving its customers who left their deposits unchanged.
However, a reading of Hetrick’s filing indicates that the regulatory landscape underwent a major transformation early in 2023. Agencies like the Federal Reserve and the FDIC have indicated that they will no longer accept banks with substantial digital asset concentrations. The change ended Silvergate’s digital asset-focused business model, compelling management to reassess its opportunities.
Crypto Collapse Leads to Silvergate’s Liquidity Crisis and $948.7M Loss
Hetrick defined a timeline of the bank’s evolution, which demonstrated deposits growing from $1.8 billion in 2019 to around $14.3 billion by 2021, principally because of crypto clients. Unfortunately, big collapses in the cryptocurrency industry, including the downfalls of Three Arrows Capital and FTX, caused dramatic drops in Silvergate’s deposits, ultimately leading to a serious liquidity crisis. The bank faced the challenge of this by selling long-term bond investments with a significant loss, which led to a hefty net loss of $948.7 million in 2022.
By the beginning of 2023, regulators’ increased inspections reached a decisive moment. Federal agency statements noted significant safety and soundness concerns regarding banks that had many dealings with crypto clients. In the face of this pressure, Silvergate’s leadership concluded that reforming its business or seeking a sale would prove too expensive. Consequently, they chose to conclude missions, indicating it to be the first mid-size bank to take such a step during the banking crisis.
The insolvency filing shows that Silvergate’s parent company has enough cash reserves to handle current litigation related to compliance with anti-money laundering regulations. Regardless, unsubsidized common stockholders may not receive any funding under the plan, as the organization prioritizes meeting its obligations.
Overall, Silvergate Bank’s closure is a stark reminder of the challenges faced by financial institutions operating within the cryptocurrency sector, particularly in light of shifting regulatory landscapes.
