The collapse of Silvergate Bank in 2023, once celebrated for its crypto-friendly stance, has been attributed to its excessive dependence on risky cryptocurrency deposits and a shift in its strategic focus, according to a recent investigation by the Federal Reserve Board’s Office of Inspector General.
Rapid Growth and Concentration
Silvergate Bank’s transformation from a relatively obscure institution in the early 2010s to a prominent crypto-centric bank, with deposits soaring from $1 billion in 2017 to $16 billion in 2021, played a significant role in its downfall. During this period of exponential growth, the bank essentially became a one-industry lender, with a majority of customer deposits being uninsured and non-interest bearing.
The factors that led to Silvergate’s voluntary liquidation. Source: Office of Inspector General
The investigation also highlighted lapses in regulatory oversight. Despite the need for Silvergate to adhere to existing banking regulations and file a new application with the Federal Reserve due to its evolving risk profile, government supervisors failed to exert sufficient pressure on the bank to implement additional risk protection measures. Concerns raised by some supervisors were not escalated adequately, resulting in a missed opportunity for early intervention.
Impact of Crypto Market Volatility
Silvergate’s vulnerability to market dynamics became apparent after the collapse of the crypto exchange FTX in November 2022. This event triggered a significant outflow of capital from the crypto sector, further straining the bank’s position.
The report also shed light on the presence of nepotism within Silvergate Bank’s senior management, contributing to an ineffective corporate structure that failed to address the mounting risks. Familial relationships among senior leadership team members hindered the bank’s risk management function, exacerbating its challenges.
Silvergate Bank’s decision to voluntarily wind down its operations in March 2023 spared it from technical failure. Consequently, the government was not required to intervene and force the repayment of deposits to customers.
Silvergate Bank’s collapse was a result of its heavy reliance on crypto deposits, regulatory oversights, and ineffective management exacerbated by nepotism. This case serves as a cautionary tale for financial institutions operating in the rapidly evolving crypto landscape, highlighting the importance of robust risk management and adherence to regulatory guidelines.