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 this week, the one that focused squarely on crypto—Silvergate Capital’s (SI) Silvergate Bank—escaped the black mark of federal aid.
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. These multi-billion dollar sales forced banks to make large write-downs because the value of portfolios had been eroded by rising interest rates over the past year. (When rates rise — and they have done so massively, with the Federal Reserve hikes — bond prices generally fall.)
CoinDesk dug into documents Silvergate Bank filed with U.S. regulators over the past two quarters to recreate executives’ quick efforts to survive the fierce deposit race.
The exercise shows that, in retrospect, the bank actually had enough cash 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 were able to avoid taking help from the government. Silvergate Capital’s share price is down 83% since March 1, when the bank said it was unable to file its annual report. But with shareholders bearing the brunt — not depositors or the government — it was, in a way, the ideal scenario for a banking meltdown, odd as that might sound.
“The bank entered the liquidity boom with sufficient capital,” said Karen Petrou, managing partner at Federal Financial Analytics.
Contrast the case study with that of Silicon Valley Bank, which so baffled markets and investors that U.S. Treasury Secretary Janet Yellen on Friday summoned leaders from the Federal Reserve, Office of the Comptroller of the Currency and the FDIC “to discuss developments around Silicon Valley Bank.”
“Yellen expressed full confidence in banking regulators to take appropriate action in response and noted that the banking system remains resilient and that regulators have effective tools to deal with this type of event,” according to a statement. of 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, generally speaking. Blame Silvergate supervisors for allowing Silvergate Bank to take on crypto deposits and exposing itself to the nascent blockchain industry. But at least in this case, the crypto cannot be blamed for draining the FDIC insurance fund.
Representatives for Silvergate Capital did not respond to CoinDesk’s requests for comment for this report.
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, according to filings.
Over the next three months, deposits declined to around $6.3 billion, forcing the bank to raise more cash by selling its securities portfolio, to around $5.7 billion at the end of 2022.
“It was a classic bank run,” said Thomas Braziel, managing partner at 507 Capital.
One of the problems was that the securities had lost value due to rising interest rates, so when the company liquidated them, it made big losses.
Partly as a result, the bank’s equity was cut by about half during the quarter, to about $571.8 million, according to filings. The damage showed in a key indicator of the health of banks monitored by supervisors known as the “leverage ratio”, which fell to 5.1% at the end of the year from 10.5% three months earlier.
This put Silvergate Bank on the brink: according to filings with securities regulators, it needed a leverage ratio of at least 5.1% to be considered “well capitalized”.
Even so, this cushion of capital would prove sufficient to absorb the remaining losses as Silvergate Bank struggled to meet depositors’ needs in its final months.
Silvergate Capital CEO Alan Lane told investors on a Jan. 17 conference call that the company initially used wholesale funding to meet cash outflows, but then sold the debt securities “to make face lower deposit levels and maintain our highly liquid balance sheet.”
Notably, at the end of the year, Silvergate Bank’s remaining $4.5 billion in cash and securities was compared to $6.3 billion in deposits, helping executives cope. , relatively easily, to further withdrawals in early 2023.
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, ensuring maximum flexibility for our clients,” Lane told investors.
Regulatory documents show that Silvergate Bank, in its rush to raise funds, had obtained some $4.3 billion in advances at the end of 2022 from the Federal Home Loan Bank of San Francisco – a type of government-backed wholesale funding which is available to banks but is generally considered 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 their core deposits to exceed their non-core funding,” he said.
In this case, this reliance on wholesale funding proved crucial. In a securities filing on March 1, Silvergate Capital disclosed that it had been forced to accelerate securities sales to raise funds to repay advances from the Federal Home Loan Bank of San Francisco, and had to incur additional losses.
Silvergate Bank “has made the decision to repay all outstanding advances to FHLBank San Francisco in full,” according to a statement from the government-sponsored firm, which was established to support community lending and investment. “All advances were fully secured at all times 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 “assessing the impact these subsequent events have on its ability to continue as a going concern.”
This latest announcement seems to have sounded the death knell for Silvergate Capital; over the next few days, the company’s stock price fell and major customers announced they were pulling out of business. Speculation has swirled that the bank could be taken over by the FDIC.
On March 8, Silvergate Capital announced its intention to “voluntarily liquidate the bank in an orderly manner” and that the plan called for “the full repayment of all deposits”.
It certainly wasn’t pretty. But in the end, depositors were satisfied — without FDIC intervention.