Here’s what could happen next to crypto-friendly bank Silvergate Capital

Once a crucial banking partner for crypto firms, Silvergate Capital (SI), is now on the brink of failure.

The La Jolla, Calif.-based company said late Friday that it was suspending its Silvergate Exchange Network (SEN), but “other deposit-related services remain operational.”

The announcement came about an hour after Moody’s downgraded Silvergate’s bank deposit rating from Ba3 to Caa1, a blow that deems the bank’s bonds subject to very high credit risk.

In November, Silvergate faced both financial losses and regulatory investigations largely due to the collapse of major clients such as FTX and related hedge fund Alameda Research.

Silvergate’s stock, which fell on Thursday and Friday, has fallen 95% in the past year.

On Thursday, Silvergate said it had to further delay its annual report and the bank expected further losses beyond a nearly $1 billion drop in net losses it announced in January’s preliminary results. fourth trimester.

The bank also cited ongoing regulatory investigations, investigations by lawmakers and its “ability to continue operating for the twelve months following the release of these financial statements.”

Silvergate has faced a run on deposits from the crypto companies it has banked, including Coinbase, Paxos, Galaxy Digital and others, which have made an effort to distance themselves from the struggling bank.

What happens next?

In the worst case, Silvergate could file for bankruptcy.

More likely, the FDIC-insured bank could go into receivership.

Much like bankruptcy, receivership acts as a “protective umbrella” where a “receiver” or trustee is appointed to take over the business with the ultimate goal of protecting creditors, especially those with secured loans.

Unlike bankruptcy, receivership is not a legal action and is intended to protect a company’s lenders rather than borrowers (as is the case in bankruptcy).

Jesse Austin, a former partner in the bankruptcy firm of King & Spaulding, explained that receivership decisions and enforcement are made by two federal banking regulators, the U.S. Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

“If the monitor finds Silvergate undercapitalized, they will refer it to the FDIC, then the FDIC will step in and shut down the bank,” Austin told Yahoo Finance.

Although the bankruptcy code specifically prevents a bank from filing for Chapter 11 or Chapter 7 bankruptcy, Austin said Silvergate’s holding company could still file for bankruptcy, especially if it has other valuable assets in addition to the customer deposits.

Besides Silvergate’s SEN network, the company also owns stablecoin assets purchased from Meta’s stablecoin project, Diem, in January last year for 1.2 million shares and $50 million in cash. .

The crypto-friendly bank’s troubles follow joint statements in January and February released by the Federal Reserve with the FDIC and OCC that warned of volatility risks for banks that cater to crypto customers.

In light of Silvergate’s stance, the statements raise further questions about whether U.S. banks will become “much more timid” to the digital asset industry, limiting crypto firms’ access, a source says. banking sector familiar with the capitalization of Silvergate.

“On the one hand, if the crypto is going to be there and Americans are putting their dollars in it, don’t you really want those dollars to be held in the United States versus foreign banks?” that person, who requested anonymity to speak freely about Silvergate, told Yahoo Finance. “It may not be that if you’re a bank you can’t accept these types of deposits, but you have to limit them proportionally on your balance sheet.”

How Silvergate Reached the Brink

Silvergate became a regional bank in 1996, but it wasn’t until 2014 that CEO Alan Lane picked the company to start serving crypto clients like the now bankrupt Genesis.

The company has carved out a niche for itself by providing banking access to a growing number of crypto startups, and the bank’s offerings have evolved into a formalized payment platform known as the Silvergate Exchange Network, where crypto depositors operating 24 hours a day, 7 days a week, could make US dollar transfers and loans outside of traditional banking hours.

Silvergate held $1.8 billion in total deposits and $2 billion in assets at the end of its fourth quarter of 2018. At the crypto peak in 2021, its total deposits and assets had grown to $14.3 billion and $16 billion, respectively.

The Silvergate logo displayed on a phone screen and representation of cryptocurrencies are seen in this illustrative photo taken in Krakow, Poland on January 29, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

The Silvergate logo displayed on a phone screen and representation of cryptocurrencies are seen in this illustrative photo taken in Krakow, Poland on January 29, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

Following the bankruptcy of crypto exchange FTX, Silvergate’s total deposits and assets fell to $6.2 billion and $11.3 billion at the end of the fourth quarter of last year.

With this decline in deposits, Silvergate’s capital relative to its assets has halved. This leverage ratio fell from 10.7% in the third quarter to 5.3%, a specific level of concern for banks, with regulators having reason to intervene for any US bank below 5%.

“The difficulty here is that Silvergate was not a huge bank,” the banking industry source told Yahoo Finance. “They strategically increased their deposits by working with crypto companies, but their crypto deposits grew much larger than the rest of their business.”

David is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers

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