The San Francisco Federal Reserve has released its report on the voluntary liquidation of Silvergate Bank. Silvergate Bank was established as an industrial lending bank in 1988 and then in 2012 became a state member bank overseen by FRB San Francisco. Starting around 2013, the bank shifted its focus towards the cryptocurrency industry, allowing it to experience rapid deposit growth.
However, following the failure of the former FTX cryptocurrency exchange in November 2022, the bank holding company announced in March 2023 that it would voluntarily liquidate its assets and pay out deposits.
In March 2023, the Federal Reserve Bank of San Francisco launched a discretionary investigation to identify the reasons for the bank's problems. According to the board, its review covered supervisory actions taken between 2013 and 2023 that were related to Silvergate's changing business strategy, deposit growth, concentrated trading activity, and Silvergate's governance and risk management procedures.
In its report published on September 27, 2023, the FRB shed light on key findings worth highlighting:
Silvergate's decision to shift its business strategy towards the crypto industry in 2013 proved advantageous. This strategic shift resulted in a notable increase in deposits, which skyrocketed from $1 billion in 2017 to surpass $16 billion in 2021.
Expanding on this point, it is important to highlight that these deposit accounts were primarily funded by companies operating within a specific industry. Furthermore, it is worth mentioning that most of these deposits lacked insurance coverage and did not earn interest. Consequently, these deposits faced a significant risk of sudden withdrawal, which is precisely what occurred in November 2022. The FTX exchange collapse triggered a substantial outflow of deposits, which subsequently caused a liquidity crisis for Silvergate.
The bank's management failed to effectively implement risk management practices, and rapid growth likely outpaced its capabilities.
Additionally, the Federal Reserve Board (FRB) identified the bank's practice of providing financing to multiple companies in the crypto industry as a factor contributing to its increased exposure to market volatility.
Additionally, the FRB accused the bank's senior management of nepotism, citing family relationships within the management team as a reason for the ineffective implementation of risk management measures.
The FRB explicitly stated that the bank was not going bankrupt but was making a decision to cease operations.
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