The First to Fall: Silvergate Bank

The 2023 banking crisis in the United States led to the second, third-, and fourth-largest bank failures since the 2008 financial crisis.

First Republic Bank, Silicon Valley Bank, and Signature Bank collapsed, respectively. However, the first bank to fall was Silvergate Bank, a La Jolla, California-based institution primarily serving clients in the digital assets industry. This focus led many to label it a 'crypto bank.'

The Regulatory Shift

In a new bankruptcy filing, Elaine Hetrick, Silvergate Capital Corporation's chief administrative officer, argues that the bank stabilized despite the contraction of the cryptocurrency industry and rising interest rates.

According to Hetrick, Silvergate met regulatory capital requirements and had the capability to continue serving its customers who had kept their deposits with the bank.

However, in 2023, a 'sudden regulatory shift' from agencies including the Federal Reserve, FDIC, and the Office of the Comptroller of the Currency (OCC) made it clear that they would not tolerate banks with significant concentrations of digital asset customers.

This shift ultimately prevented Silvergate Bank from continuing its digital asset-focused business model, the filing claims.

Silvergate's Collapse: A Timeline

Hetrick's bankruptcy filing declaration offers a timeline of events leading to Silvergate Bank's closure on March 8, 2023. This was just two days before the closure of Silicon Valley Bank and four days before regulators seized Signature Bank.

According to Hetrick, serving crypto clients helped the relatively small bank balloon in size, with deposits increasing from $1.8 billion at the end of 2019 to approximately $14.3 billion at the end of 2021.

Through the end of 2021 and the first half of 2022, crypto clients represented 'substantially all' of the bank's noninterest-bearing deposits.

However, the notable collapses in the crypto industry in 2022, from Three Arrows Capital to FTX, led to a contraction in deposits and even caused a run on the bank. Silvergate managed this by selling long-term bond investments at a significant loss.

As a result, Silvergate's consolidated business reported a net loss of $948.7 million for the year ending December 31, 2022, compared to a net income of $75.5 million for the year ending December 31, 2021.

Yet, as the bank downsized to continue operations, it still held assets valued more than deposits and met its regulatory capital requirements at the beginning of 2023.

Intense Regulatory Pressure

In early 2023, increased attention from regulators led to an 'inflection point' regarding the bank's business model. Federal banking agencies, including the Federal Reserve, FDIC, and OCC, noted their 'significant safety and soundness concerns' with business models with concentrated exposure to the crypto sector.

They also highlighted the liquidity risks banks face by primarily servicing crypto customers.

The increased pressure from regulators on banks serving crypto customers ultimately forced Silvergate to consider one of three options:

• Remake its business away from crypto customers.
• Sell itself as a going concern.
• Begin to wind down operations.

After careful analysis, the bank's management determined that remaking the business and pursuing a sale would be too costly. They announced their intention to wind down the bank on March 8, 2023, making Silvergate the first mid-size bank in 2023.

'Despite facing an unprecedented confluence of industry and regulatory pressures, Silvergate Bank did not fail,' the filing claims.

Yet, the shift in regulators' pressure would have made continuing the crypto-focused business impossible, similar to the shuttered Signature Bank, whose closure illustrated the intense regulatory pressure faced by banks in the digital assets industry at that time.

Next Steps

Silvergate's parent corporation held enough cash to settle multiple lawsuits related to Silvergate's monitoring of transactions in compliance with anti-money laundering procedures. The bank expects to repay bondholders fully.

According to the filing, the corporation now holds $163.1 million in cash and equivalent assets and does not expect to be able to repay holders of its common stock.

The bank is also engaged in litigation against an activist investor attempting to secure a seat on the debtor's board to secure payments for shareholders set to receive nothing under the plan, Law360 reported.