How Silvergate’s crypto collapse differed from Silicon Valley Banks: No bailout

For all the angst this week about how problems in the crypto industry are fueling a banking crisis, the reality so far is actually something else: Of the two banks that failed, one focused on crypto — Silvergate Capital — escaped a federal bailout black mark .

Similarities have been drawn between the collapses of the two California-based banks – namely that both were hit by a flood of withdrawals, forcing managers to liquidate securities held as reserves. These multibillion-dollar sales forced the banks to take large write-downs, as the values ​​of their portfolios had been eroded by rising interest rates over the past year. (When interest rates rise—and they have massively, with Federal Reserve hikes—bond prices typically fall.)

CoinDesk dug through Silvergate Bank’s filings over the past couple of quarters with U.S. regulators to recreate its executives’ swift efforts to survive the violent deposit run.

The exercise shows that in retrospect 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 leaders managed to avoid taking government aid. Silvergate Capital’s share price has fallen 83% since March 1, the day it said it was unable to file its annual report. But with shareholders being hit – not depositors or the government – ​​it was sort of the ideal scenario for a bank collapse. As strange as it sounds.

“The bank entered the liquidity squeeze with ample capital,” said Karen Petrou, a managing partner at Federal Financial Analytics.

Compare the case study with that of Silicon Valley Bank, which made markets and investors so nervous that US Treasury Secretary Janet Yellen on Friday called in executives from the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC “to discuss the developments surrounding Silicon Valley Bank. “

“Yellen expressed full confidence that banking regulators are taking appropriate action in response and noted that the banking system remains resilient and that regulators have effective tools to deal with these types of incidents,” according to a statement from the Treasury Department.

Blame Silvergate Bank for taking a lot of risk on the crypto industry, and blame the crypto industry for taking a lot of risk, in general. Blame Silvergate Bank’s supervisors for allowing Silvergate Bank to load up on crypto deposits and exposure to the nascent blockchain industry. But at least in this case, crypto can’t be blamed for draining the FDIC insurance fund.

Silvergate Capital representatives did not respond to CoinDesk’s requests for comment for this story.

At the end of September, the bank had $13.3 billion in 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 off its securities book, 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, so as the company liquidated them, it had to realize large losses.

Partly as a result, the bank’s equity was cut 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 regulators 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.”

Still, this capital cushion would prove sufficient to absorb remaining losses as Silvergate Bank struggled to meet depositors’ needs in recent months.

Silvergate Capital CEO Alan Lane told investors on a Jan. 17 conference call that the company initially used wholesale financing to meet the payouts, but then sold the debt securities “to accommodate persistently lower deposit levels and maintain our highly liquid balance sheet.”

Notably, at the turn of the year, Silvergate Bank’s $4.5 billion in cash and remaining securities was set against $6.3 billion in deposits — putting managers in a position to relatively easily meet any further withdrawals as 2023 begins.

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.

The regulatory filings show that Silvergate Bank, in its rush to raise cash, had obtained advances of about $4.3 billion by late 2022 from the Federal Home Loan Banks — a type of government-backed wholesale financing available to banks but typically seen as less preferable. than cheaper deposit financing.

Lane said on the Jan. 17 call with investors that executives intended to reduce reliance on wholesale financing.

“In general, banks like to have core deposits over and above their non-core funding,” he said.

As would happen, this reliance on wholesale funding proved crucial. In a securities filing on March 1, Silvergate Capital disclosed that it had been forced to accelerate the sale of securities to raise money to repay advances from the Federal Home Loan Bank of San Francisco and that it had to record further losses.

Silvergate Bank “decided to repay all outstanding advances to FHLBank San Francisco in full,” according to a statement from the state-sponsored entity, which was created to support lending and investment in the community. “All advances were at all times fully secured while outstanding.”

Silvergate Capital noted in its March 1 filing that the additional losses had pushed it below the “well capitalized” level and that it was “evaluating the impact these subsequent events have on their ability to continue as a going concern.”

The latest announcement appears to have sounded the death knell for Silvergate Capital; over the following days, the company’s stock price fell and major customers announced they were pulling out. Speculation swirled that the bank might be taken over by the FDIC.

On March 8, Silvergate Capital announced that it intended to “voluntarily liquidate the bank in an orderly manner” and that the plan included “full repayment of all deposits.”

It certainly wasn’t pretty. But in the end, depositors were happy—without FDIC intervention.