Silvergate Bank, a cryptocurrency-friendly bank, finally collapsed this year due to overreliance on risky crypto deposits and nepotism that led to ineffective management, according to Federal Reserve inspectors.
In an executive dated September 27 summary In its review of the Silvergate Bank collapse, the Federal Reserve Board's Office of Inspector General noted Silvergate's change in strategy to focus on "customers engaged in cryptographic activities" in 2013.
"Silvergate's concentration on crypto industry deposit customers, rapid growth and multi-tiered funding risks led to the bank's voluntary liquidation."
From a little-known institution in the early 2010s, Silvergate rapidly expanded to become the leading bank for crypto customers, growing from $1 billion in deposits in 2017 to $16 billion in 2021.
During this period of rapid growth, the Federal Reserve said the bank grew to essentially become a single-industry lender, with the vast majority of its customers' deposits uninsured and interest-free.
Had the institution properly followed existing banking regulations, it should have filed a new application with the Federal Reserve, but government supervisors failed to pressure it to establish new risk protection measures.
While some government supervisors had expressed concern about the bank's activities, the Federal Reserve said they should have been stepped up through "stronger, earlier and more decisive supervisory actions."
Silvergate's overreliance on cryptocurrencies suddenly became apparent after the collapse of now defunct FTX crypto exchange in November 2022, with tens of billions of dollars in capital fleeing the sector in the following months.
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Silvergate's alleged wrongdoings were not limited to just cryptocurrencies. Investigators also claimed that nepotism plagued the banks' senior management, leading to an incompetent and ineffective corporate structure that failed to address the numerous risks present at the time.
"In addition, nepotism, evidenced in the various family relationships among members of the bank's senior management team, undermined the effectiveness of the bank's risk management function."
"Silvergate's board of directors and senior management were ineffective, and the bank's corporate governance and risk management capabilities did not keep pace with the bank's rapid growth, increasing complexity and evolving risk profile," the report concluded. report.
He bank voluntarily It closed in March 2023, meaning the bank did not technically go bankrupt. This meant that the government did not have to intervene and force it to return the money to depositors.
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