Differentiating Silvergate’s Crypto Collapse from Silicon Valley Bank: No Need for Bailout

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The crypto market has been facing a banking crisis this week, but the reality of the situation is more nuanced: Silvergate Capital’s Silvergate Bank, the financial institution that was focused on the crypto industry, was able to avoid the stigma of federal assistance. Even though the two California-based banks, Silvergate and Silicon Valley Bank, both experienced a surge in withdrawals, leading to the liquidation of their securities holdings, Silvergate did not require bailouts.

CoinDesk has done an analysis of Silvergate’s regulatory filings from the past few quarters in order to trace the bank’s attempt to survive the massive deposit run. It appears that Silvergate had enough liquidity to pay back all its depositors, as well as loans from the Federal Home Loan Bank of San Francisco. Thus, the shareholders were the ones to bear the brunt of the collapse, instead of the government or the depositors.

“The bank entered the liquidity wringer with ample capital,” said Karen Petrou, a managing partner at Federal Financial Analytics. This contrasts starkly with the case of Silicon Valley Bank, which prompted U.S. Treasury Secretary Janet Yellen to call a meeting of the Federal Reserve, Office of the Comptroller of the Currency and FDIC to discuss developments around the bank.

The silver lining in the Silvergate collapse is that crypto cannot be blamed for draining the FDIC insurance fund. Even though the bank had taken a lot of risks on the crypto industry, and the crypto industry had taken a lot of risks in general, it was avoided the need for government assistance. Silvergate’s share price has dropped 83% since the day the bank said it was unable to file its annual report.

At the end of September, Silvergate Bank had $13.3 billion in deposits, and its assets included $1.9 billion in cash and $11.4 billion in investment securities. Over the next three months, the deposits decreased to $6.3 billion, so the bank was forced to sell its securities portfolio, ending the year with $5.7 billion. This caused the bank’s equity capital to halve, and its “leverage ratio” to drop to 5.1%.

Thomas Braziel, managing partner at 507 Capital, said it was a classic case of a bank run. Silvergate Bank had obtained $4.3 billion of advances from the Federal Home Loan Bank of San Francisco in late 2022 to raise cash, and Alan Lane, Silvergate Capital CEO, said on a call with investors that executives intended to reduce its reliance on wholesale funding. But this reliance would ultimately prove to be their downfall, when losses forced them to accelerate the sale of securities.

Even so, the capital cushion was sufficient to meet depositors’ needs, and Lane believed that Silvergate could return to profitability in the second half of 2023. However, the company’s filing on March 1 showed that it had fallen below the “well capitalized” level, and this appears to have been the final nail in its coffin. On March 8, Silvergate Capital announced its intention to “voluntarily liquidate the bank in an orderly manner”, and all deposits were repaid without the help of FDIC.

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