In a recent bankruptcy filing, Elaine Hetrick, chief administrative officer of Silvergate Capital Corporation, attributed the collapse of Silvergate Bank to an “abrupt regulatory change” that will force the institution to close in March 2023.
Silvergate Bank, which primarily serves digital asset clients, was the first major bank to fall in the 2023 U.S. banking crisis. That crisis also saw the collapse of First Republic Bank, Silicon Valley Bank, and Signature Bank, marking some of the largest bank collapses since 2008.
Silvergate Bank has been a major player in the crypto space, often referred to as a “crypto bank.” Hetrick’s filing suggests that the bank has managed to maintain stability despite facing significant challenges from the crypto space’s shrinking and rising interest rates. The bank reportedly meets regulatory capital requirements and continues to serve clients who hold deposits at Silvergate.
However, according to Hetrick, the regulatory landscape changed in early 2023. A coordinated response from agencies like the FED, FDIC, and Office of the Comptroller of the Currency (OCC) indicated that these institutions would not tolerate banks with significant exposure to digital assets. This regulatory stance forced Silvergate to reconsider its crypto-focused business model, the filing claims, and ultimately led to its closure.
Hetrick outlined a timeline in the filing, noting that the bank announced it would close on March 8, 2023, just days before the collapse of Silicon Valley Bank and Signature Bank. He detailed how Silvergate grew rapidly by serving the digital assets sector, growing from $1.8 billion in deposits at the end of 2019 to $14.3 billion at the end of 2021. Those deposits were largely non-interest-bearing and relied heavily on crypto clients.
The collapse of major crypto firms like FTX and Three Arrows Capital in 2022 caused a sharp contraction in deposits and led to a run on the bank. Silvergate managed to manage the situation by selling long-term bond investments at a loss, but the impact was severe. The bank reported a net loss of $948.7 million in 2022, compared to net income of $75.5 million in 2021.
Despite these financial difficulties, the filing notes that Silvergate still has assets in excess of its deposits and is on track to meet its capital requirements in early 2023. Still, increased regulatory scrutiny, particularly around the risks of serving crypto-focused clients, has made it clear that the bank’s business model is no longer viable. Federal banking agencies have cited liquidity risks as a key concern, citing “significant safety and soundness concerns” about institutions with heavy exposure to the crypto sector.
Faced with increasing regulatory pressure, Silvergate’s management had three options: move away from crypto clients, sell the bank, or shut down. After careful consideration, the bank chose to close rather than seek costly alternatives, becoming the first mid-sized bank to collapse in 2023.
*This is not investment advice.
