For all the angst this week about how troubles in the crypto industry are fueling a banking crisis, the reality, so far, is actually something else: Of the two banks that went under this week, the one squarely focused on crypto – Silvergate Capital's (SI) Silvergate Bank – escaped the black mark of federal assistance.
It was Silicon Valley Bank (SVB), which has a weaker tie to digital assets, whose rapid collapse required Federal Deposit Insurance Corp. (FDIC) receivership.
Similarities have been drawn between the collapses of the two California-based banks – namely that both were hit by a flood of withdrawals, forcing executives to liquidate securities held as reserves. Those multibillion-dollar sales forced the banks to take big write-downs because the values of the portfolios had been eroded by rising interest rates over the past year. (When rates rise – and they have massively, with the Federal Reserve hikes – bond prices usually drop.)
CoinDesk dug through Silvergate Bank’s filings with U.S. regulators from over the past couple of quarters to recreate executives’ fast-moving efforts to survive the fierce deposit run.
The exercise shows that, in hindsight, the bank did actually have enough liquidity on hand to satisfy depositors in full – and pay back loans from the Federal Home Loan Bank of San Francisco.
In the end, Silvergate Bank didn’t survive. But its executives were able to avoid taking government assistance. Silvergate Capital’s share price is down 83% since March 1, the day the bank said it was unable to file its annual report. But with shareholders taking the hit – not depositors or the government – it was, in a way, the ideal scenario for a bank collapse, as strange as that sounds.
“The bank entered the liquidity wringer with ample capital,” said Karen Petrou, a managing partner at Federal Financial Analytics.
Contrast the case study with that of Silicon Valley Bank, which so unnerved markets and investors that U.S. Treasury Secretary Janet Yellen on Friday convened leaders from the Federal Reserve, Office of the Comptroller of the Currency and FDIC “to discuss developments around Silicon Valley Bank.”
“Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event,” according to a statement from the Treasury Department.
Blame Silvergate Bank for taking lots of risk on the crypto industry, and blame the crypto industry for taking lots of risk, generally speaking. Blame Silvergate’s supervisors for allowing Silvergate Bank to load up on crypto deposits and exposure to the nascent blockchain industry. But at least in this instance crypto can’t be blamed for draining the FDIC insurance fund.
Silvergate Capital representatives didn’t respond to CoinDesk’s requests for comment for this report.
When it started
At the end of September, the bank had $13.3 billion of deposits, with about $1.9 billion of its assets 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 down its book of securities, to about $5.7 billion at the end of 2022.
“It was a classic bank run,” said Thomas Braziel, managing partner at 507 Capital.
One problem was the securities had fallen in value due to rising interest rates, so as the company liquidated them it realized big losses.
Partly as a result, the bank’s equity capital was cut roughly in half during the quarter, to about $571.8 million, the filings show. The damage appeared in a key gauge of bank health monitored by supervisors known as the “leverage ratio,” which fell to 5.1% at the end of the year 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.”
Even so, that capital cushion would prove sufficient to absorb remaining losses as Silvergate Bank scrambled to meet depositors’ needs in its final months.
Silvergate Capital CEO Alan Lane told investors on a conference call Jan. 17 that the company initially used wholesale funding to satisfy the outflows, but subsequently sold the debt securities “to accommodate sustained lower deposit levels and maintain our highly liquid balance sheet.”
Notably, as of year’s end, Silvergate Bank’s $4.5 billion of cash and remaining securities were set against $6.3 billion of deposits – putting executives in a position to, relatively easily, meet any further withdrawals as 2023 began.
At the time, Lane said he believed that 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, ensuring maximum flexibility for our customers,” Lane told the investors.
The regulatory filings show that Silvergate Bank, in its haste to raise cash, had obtained some $4.3 billion of advances in late 2022 from the Federal Home Loan Bank of San Francisco – a type of government-backed wholesale funding that’s available to banks but typically is seen as less preferable than cheaper deposit funding.
Lane said on the Jan. 17 call with investors that executives intended to reduce its reliance on wholesale funding.
“In general, banks like to have their core deposits in excess of their noncore funding,” he said.
As it would happen, that reliance on wholesale funding proved crucial. In a securities filing on March 1, Silvergate Capital disclosed that it had to accelerate sales of securities to raise money to repay advances from the Federal Home Loan Bank of San Francisco, and it had to record additional losses.
Silvergate Bank “made a determination to repay all advances outstanding to FHLBank San Francisco in full,” according to a statement from the government sponsored enterprise, which was created to support community lending and investment. “All advances were at all times fully collateralized while they were outstanding.”
Silvergate Capital noted in its March 1 filing that the extra losses had pushed it below the “well capitalized” level and that it was “evaluating the impact that these subsequent events have on its ability to continue as a going concern.”
That last announcement appears to have sounded the death knell for Silvergate Capital; over the ensuing days, the company’s share price plummeted and major clients announced they were pulling their business. Speculation swirled that the bank might get taken over by the FDIC.
On March 8, Silvergate Capital announced it intended to “voluntarily liquidate the bank in an orderly manner” and that the plan included “full repayment of all deposits.”
It sure wasn’t pretty. But in the end, depositors were satisfied – with no FDIC intervention.
UPDATE (March 15, 2023, 18:24 UTC): On March 15, FHLBank San Francisco said it did not force Silvergate to repay its loans.
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