The San Francisco Federal Reserve has published its report on the voluntary liquidation of Silvergate Bank. Silvergate Bank was established as an industrial loan bank in 1988, and then in 2012, it became a state member bank supervised by FRB San Francisco. From around 2013, the bank changed its focus to the crypto industry, which enabled it to experience rapid deposit growth.
However, following the failure of the former crypto exchange FTX 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, their review covered supervisory actions taken between 2013 and 2023 that were connected to Silvergate’s shifting business strategy, deposit growth, concentrated business activity, and governance and risk management procedures.
In its report released on September 27, 2023, FRB shed light on key findings worth noting:
Silvergate’s decision to shift its business strategy towards the crypto industry in 2013 proved advantageous. This strategic shift resulted in a remarkable surge in deposits, skyrocketing from $1 billion in 2017 to surpass $16 billion in 2021.
Expanding on this point, it’s important to highlight that these deposit accounts were primarily funded by companies operating within a specific industry. Additionally, it’s worth mentioning that the majority of these deposits lacked insurance coverage and did not accrue 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, subsequently leading to a liquidity crisis for Silvergate.
The management of the bank failed to effectively implement risk management practices, and the rapid growth likely exceeded their capabilities.
Additionally, the Federal Reserve Board (FRB) identified the bank’s practice of providing funding to multiple companies in the crypto industry as a contributing factor to their increased exposure to market volatility.
Furthermore, the FRB accused the bank’s senior management of nepotism, citing familial 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 failing but rather making the decision to cease its operations.