Silvergate executive says 'sudden regulatory shift' led to bank's shutdown in bankruptcy filing

The 2023 banking crisis in the United States led to the second-, third-, and fourth-largest bank failures in the United States following the 2008 financial crisis: the collapses of First Republic Bank, Silicon Valley Bank, and Signature Bank, respectively. However, the first bank to fall in the crisis was Silvergate Bank, a La Jolla, California based institution that primarily served clients in the digital assets industry, leading many to label it a "crypto bank." 

In a new bankruptcy filing, the executive in charge of winding down the shuttered Silvergate Bank's holding company argues that despite the contraction of the cryptocurrency industry and rising interest rates, the bank "...had stabilized, was able to meet regulatory capital requirements, and had the capability to continue to serve its customers that had kept their deposits with Silvergate Bank."

However, in 2023, a "sudden regulatory shift" from agencies including the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (OCC), "made clear that, at least as of the first quarter of 2023, the [agencies] would not tolerate banks with significant concentrations of digital asset customers, ultimately preventing Silvergate Bank from continuing its digital asset focused business model," the filing claims . 

Silvergate's collapse: A timeline

Silvergate Capital Corporation chief administrative officer Elaine Hetrick's bankruptcy filing declaration offers a timeline of events that led Silvergate bank to close on March 8, 2023, two days before the closure of Silicon Valley Bank and four days before the seizure of Signature Bank by regulators.

According to Hetrick, serving crypto clients helped the relatively small bank balloon in size, "...with its deposits increasing from $1.8 billion at the end of 2019 to approximately $14.3 billion at the end of 2021," with crypto clients representing "substantially all" of the bank's noninterest bearing deposits (i.e. checking accounts) through the end of 2021 and the first half of 2022. 

However, the notable collapses in the crypto industry in 2022, from Three Arrows Capital to FTX, led deposits to contract and even caused a run on the bank that Silvergate was able to manage 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 ended December 31, 2022 as compared to net income of $75.5 million for the year ended December 31, 2021, largely driven by sales of long-dated securities impaired by rising interest rates," the filing states. Yet as the bank downsized in order to continue operations, it "...still held assets valued in excess of deposits and met its regulatory capital requirements," at the beginning of 2023, the filing states. 

Yet in early 2023, increased attention from regulators led to an "inflection point" regarding the bank's business model, according to the filing. Of note are two statements from federal banking agencies including the Federal Reserve, FDIC, and the OCC noting their "significant safety and soundness concerns" with business models that have concentrated exposure to the crypto sector and the liquidity risks banks face by servicing primarily customers involved with crypto. 

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, or begin to wind down operations. After a careful analysis, the filing states, the bank's management determined that both remaking the business and pursuing the sale would be too costly and announced their intention to wind down the bank on March 8, 2023, the first mid-size bank to do so in 2023. 

"Despite facing an unprecedented confluence of industry and regulatory pressures, Silvergate Bank did not fail," the filing claims. Yet the shift in pressure from regulators would have made continuing the crypto-focused business impossible, similarly to the shuttered Signature Bank, whose closure was "...illustrative of the intense regulatory pressure faced by banks in the digital assets industry at that time," the filing states. 

Next steps

Silvergate's parent corporation held enough in cash to settle multiple lawsuits related to Silvergate's monitoring of transactions in compliance with anti-money laundering procedures and the bank expects to fully repay bond holders. The corporation now holds $163.1 million in cash and equivalent assets, according to the filing, 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 score a seat on the debtor's board in order to secure payments for shareholders set to receive nothing under the plan, Law360 reported .