For all the fear this week about how troubles in the crypto industry are fueling a banking crisis, the reality so far is actually different: Of the two banks that went under this week, one was directly focused on crypto – that of Silvergate Capital ( SI) Silvergate Bank – escaped the black spot of federal aid.
Similarities were noted between the collapses of the two California-based banks — namely that both were hit by a spate of withdrawals that forced executives to liquidate securities held as reserves. These billion-dollar sales forced the banks to write down large amounts because the values of the portfolios had been eroded by rising interest rates in the past year. (When interest rates rise — and they have done massively with the Federal Reserve’s hikes — bond prices usually fall.)
CoinDesk has combed through Silvergate Bank’s filings with U.S. regulators over the past few quarters to replicate executives’ swift efforts to survive the fierce rush for deposits.
The exercise shows that, with hindsight, the bank actually had enough liquidity on hand to fully satisfy depositors — and repay loans from the Federal Home Loan Bank of San Francisco.
In the end, Silvergate Bank did not survive. But its executives managed to avoid resorting to government aid. Silvergate Capital’s share price has fallen 83% since March 1, the day the bank said it couldn’t file its annual report. But since shareholders were affected — not depositors or the government — in a way, strange as that might sound, it was the ideal scenario for a bank failure.
“The bank entered the liquidity crisis with ample capital,” said Karen Petrou, managing partner at Federal Financial Analytics.
Compare the case study to that of the Silicon Valley bank, which so unsettled markets and investors that US Treasury Secretary Janet Yellen on Friday convened senior officials from the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC to “give the Discuss developments around the Silicon Valley Bank. ”
“Yellen expressed her full confidence in banking regulators to take appropriate action, noting that the banking system remains resilient and regulators have effective tools to respond to these types of incidents,” the bank said in a statement Ministry of Finance.
Blame Silvergate Bank for taking a lot of risk on the crypto industry and blame the crypto industry in general for taking a lot of risk. Blame Silvergate’s executives for allowing Silvergate Bank to top up crypto deposits and expose itself to the burgeoning blockchain industry. But at least in this case, crypto cannot be blamed for depleting the FDIC insurance fund.
Representatives from Silvergate Capital did not respond to CoinDesk’s requests for comment on this report.
At the end of September, the bank had $13.3 billion in deposits, including about $1.9 billion in cash and $11.4 billion in investment securities, the filings show.
Over the next three months, deposits shrank to about $6.3 billion, forcing the bank to raise more cash by selling its securities portfolio, to about $5.7 billion by the end of 2022.
“It was a classic bank run,” said Thomas Braziel, managing partner at 507 Capital.
One problem was that the securities had fallen in value due to rising interest rates, causing the company to lose heavily on liquidation.
Partly as a result, the bank’s equity was roughly halved to approximately $571.8 million during the quarter, the filings show. The damage was evident in a key indicator of bank health monitored by regulators known as the leverage ratio, which fell to 5.1% at year-end from 10.5% just three months earlier.
That put Silvergate Bank right on the edge: According to filings with securities regulators, it needed a leverage ratio of at least 5.1% to be considered “well capitalized.”
Nonetheless, this capital cushion would prove sufficient to offset remaining losses as Silvergate Bank struggled to meet depositors’ needs in recent months.
Alan Lane, CEO of Silvergate Capital, told investors in a Jan. 17 conference call that the company initially used wholesale financing to meet the outflows, but subsequently sold the debt “to offset persistently lower deposit levels and our highly liquid balance sheet to maintain”.
Notably, at the end of the year, Silvergate Bank’s $4.5 billion in cash and remaining securities was offset by $6.3 billion in deposits — putting executives in position to start 2023 relatively easy to handle further withdrawals.
At the time, Lane said he believed Silvergate “could return to profitability in the second half of 2023.”
“We are committed to maintaining a highly liquid balance sheet with minimal credit exposure and a strong capital position to ensure maximum flexibility for our clients,” Lane told investors.
Regulatory filings show that Silvergate Bank, in its rush to raise cash, had received approximately $4.3 billion in advances from San Francisco’s Federal Home Loan Bank in late 2022 — a type of government-backed wholesale financing that banks, but is usually considered less preferable than cheaper deposit funding.
Lane said on the Jan. 17 call with investors that executives intend to reduce reliance on wholesale financing.
“In general, banks want their core deposits to exceed their non-core funding,” he said.
As it turned out, this reliance on wholesale financing proved crucial. In a March 1 securities filing, Silvergate Capital announced that it was forced to accelerate sales of securities to raise money to pay off advances from the Federal Home Loan Bank of San Francisco and that it was posting additional losses.
Silvergate Bank “decided to repay all outstanding advances in full to FHLBank San Francisco,” according to a statement from the state-sponsored company, which was formed to support community lending and investment. “All advances were fully collateralised at all times while outstanding.”
Silvergate Capital noted in its March 1 filing that the additional losses had pushed the company below “well capitalized” levels and that it was “assessing the impact these subsequent events have on its ability to continue as a going concern.”
This latest announcement appears to have sounded the death knell for Silvergate Capital; In the days that followed, the company’s share price plummeted and major customers announced they were going out of business. There was speculation that the bank could be taken over by the FDIC.
On March 8, Silvergate Capital announced that it intends to “voluntarily liquidate the bank in an orderly manner” and that the plan calls for “full repayment of all deposits.”
It sure wasn’t nice. But in the end, depositors were satisfied — with no FDIC intervention.
