Despite all the fear this week about how troubles in the crypto industry are fueling a banking crisis, the reality so far is actually somewhat different: Of the two banks that went under this week, the one that was completely focused on crypto – Silvergate Capital’s (SI ) Silvergate Bank – escaped the black mark of federal aid.
Similarities have been found between the collapse of the two California-based banks – namely that both were hit by a deluge of withdrawals, forcing executives to liquidate securities held as reserves. Those billion-dollar sales forced the banks to write down large amounts as the value of the portfolios had been eroded by rising interest rates over the past year. (When interest rates rise — which is huge, with the Federal Reserve hikes — bond prices tend to fall.)
CoinDesk has been sifting through Silvergate Bank’s filings with US regulators in recent quarters to mimic executives’ swift efforts to survive the fierce deposit run.
The exercise shows that, in retrospect, the bank did indeed have enough liquidity on hand 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 the executives were able to avoid getting government support. Silvergate Capital’s share price is down 83% since March 1, the day the bank said it could not file its annual report. But with shareholders taking the hit — not the depositors or the government — it was, in a way, the ideal scenario for a bank collapse, strange as that may sound.
“The bank entered the liquidity crisis with ample capital,” said Karen Petrou, managing partner at Federal Financial Analytics.
Compare the case study to that of Silicon Valley Bank, which so unnerved markets and investors that U.S. Treasury Secretary Janet Yellen on Friday convened leaders of the Federal Reserve, Office of the Comptroller of the Currency and FDIC “to review developments around Silicon Valley Bank.” to discuss. ”
“Yellen expressed full confidence in banking regulators to take appropriate action and noted that the banking system remains resilient and that regulators have effective tools to deal with these types of events,” a statement from the Treasury Department said.
Blame Silvergate Bank for taking a lot of risk in the crypto industry, and blame the crypto industry for taking a lot of risk in general. Blame Silvergate regulators for allowing Silvergate Bank to charge crypto deposits and exposure to the burgeoning blockchain industry. But in this case, at least crypto can’t be blamed for depleting the FDIC insurance fund.
Silvergate Capital representatives 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 papers, the filings show.
Over the next three months, deposits shrunk to about $6.3 billion, forcing the bank to raise more cash by selling its securities book, to about $5.7 billion by the end of 2022.
“It was a classic bank run,” said Thomas Braziel, managing partner at 507 Capital.
One problem was that the securities had fallen in value due to rising interest rates, so when the company liquidated them, it incurred huge losses.
Partly as a result, the bank’s equity was roughly halved during the quarter to about $571.8 million, filings show. The damage showed up in a key measure of bank health monitored by regulators known as the “leverage ratio,” which fell to 5.1% at year-end from 10.5% just three months earlier. .
That put Silvergate Bank on edge: According to filings with securities regulators, it needed a leverage ratio of at least 5.1% to be considered “well capitalized.”
Still, that capital buffer would prove to be enough to absorb the remaining losses as Silvergate Bank scrambled to meet depositors’ needs in its final months.
Alan Lane, CEO of Silvergate Capital, told investors on a Jan. 17 conference call that the company initially used wholesale funding to meet the outflows, but then sold the debt securities “to absorb continued lower deposits and maintain our highly liquid balance sheet.” .”
Particularly at the end of the year, Silvergate Bank’s $4.5 billion in cash and remaining securities were set against $6.3 billion in deposits, making it relatively easy for executives to meet further withdrawals from the start of 2023 .
Lane said at the time that 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.
The filings show that Silvergate Bank, in its rush to raise cash, obtained some $4.3 billion in advances from the Federal Home Loan Bank of San Francisco — a type of government-backed wholesale financing — by the end of 2022. available to banks, but has generally been seen as less preferable than cheaper deposit financing.
Lane said during the Jan. 17 investor call that executives planned to reduce reliance on wholesale financing.
“In general, banks like their core deposits to be larger than their non-core funding,” he said.
Coincidentally, that reliance on wholesale financing turned out to be crucial. In a securities filing on March 1, Silvergate Capital announced it was forced to accelerate its sale of securities to raise funds to pay back advances from the Federal Home Loan Bank of San Francisco and posted additional losses.
Silvergate Bank is “committed to repaying in full all outstanding advances to FHLBank San Francisco,” said a statement from the government-sponsored company, which was formed 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 “evaluating the impact these subsequent events have on its ability to continue as a going concern.”
That latest announcement seems to have been the death knell for Silvergate Capital; in the following days, the company’s stock price plummeted and major clients announced they were pulling out of their businesses. There was speculation that the bank could be taken over by the FDIC.
On March 8, Silvergate Capital announced that it intended to “voluntarily liquidate the bank in an orderly manner” and that the plan included “full repayment of all deposits”.
It certainly wasn’t pretty. But in the end, savers were satisfied — without the intervention of the FDIC.
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