Silvergate, a California bank that deals mostly in cryptocurrency transactions, saw its stock fall 48 percent on Thursday, Jan. 5 after the Wall Street Journal reported that the collapse of the FTX crypto exchange in November 2022 caused a run on the bank.
When the FTX crypto exchange declared bankruptcy, Silvergate was forced to sell assets at a heavy loss to cover $8.1 billion in withdrawals.
FTX was a Silvergate client and companies controlled by founder Sam Bankman-Fried accounted for about $1 billion of the bank’s deposits.
Silvergate is under intense scrutiny over its relationship with FTX and Bankman-Fried’s crypto-trading firm, Alameda Research, Wall Street Journal reported.
Its tanking stock price is helping intensify fears that the FTX collapse may have a broader impact on the financial system.
“The worst-case scenario seems to have come to pass” for Silvergate, said Jared Shaw, an analyst at Wells Fargo & Co., in a note.
Silvergate helps institutional investors move dollars in and out of crypto-trading platforms through its Silvergate Exchange Network, which links the bank accounts of investors and exchanges.
Silvergate stock has fallen 85 percent in the last three months.
Its crypto-related deposits fell 68 percent in the fourth quarter, Silvergate said in an early release of some quarterly results.
A bank run of that size is highly unusual, David Benoit reported for the Wall Street Journal. By comparison, banks that closed during the Great Depression between 1930 and 1933 averaged a deposit decline of nearly 38 percent, according to a 1938 study by the Federal Reserve. Only nine banks out of a sample of 67 saw deposits fall by more than 50 percent.
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Banks that failed during the 2008-2009 financial crisis had declining deposits between 10 percent and 20 percent, according to Fed historian Jonathan D. Rose.
How did Silvergate survive such a drastic decline in deposits?
To satisfy the withdrawals, it liquidated debt on its balance sheet at a $718 million loss, which “far exceeds the bank’s total profit since at least 2013,” according to the Wall Street Journal.
Silvergate isn’t structured like most banks, Benoit wrote. It sold off a lot of its traditional banking operations and branches to focus on providing bank accounts to crypto exchanges and investors. Crypto-related deposits account for 90 percent of its total, and it keeps almost all deposits in cash or easy-to-sell securities.
At the end of Q4, Silvergate said it had more cash on hand — $4.6 billion — than its $3.8 billion in remaining deposits. It had another $5.6 billion in debt securities such as U.S. Treasurys that could be sold quickly.
Bankman-Fried, who awaits trial on fraud and money laundering charges, has blamed the use of customer funds on outdated systems and risk-management failures. In its early days, he has said, FTX didn’t have a bank account, so customers looking to trade on the exchange wired money to Alameda’s bank accounts. Some of that money appears to have been transferred to an account at Silvergate.
Silvergate has suggested it didn’t know that the money going into Alameda was supposed to go to FTX.
“At Silvergate, we understand and share the concerns being widely expressed that FTX apparently was directing its customers to wire money to Alameda’s accounts,” CEO Alan Lane wrote in a letter to lawmakers who questioned the bank’s relationship with Bankman-Fried’s companies.
Silvergate’s shares have been heavily shorted at great profit. Shorts are up more than $400 million in the past year, according to S3 Partners, WSJ reported.
It’s likely all banks with ties to crypto will face increased government oversight, according to Sultan Meghji, former chief innovation officer for the Federal Deposit Insurance Corp.
“Whether or not it’s been announced publicly, I think there’s a serious push to get crypto completely separated from the U.S. banking system,” Meghji told Bloomberg.
Silvergate appears to have avoided insolvency for now, according to Todd Baker, a senior fellow at Columbia Business School and former chief strategy officer at three large banks. But it illustrates the problems crypto-focused banks have in managing volatility and risk, Baker said.
“Ultimately, the bank is going to have to abandon this crypto-first business model if it wants to continue doing business,” he said.
Image: Silvergate CEO Alan Lane, second from right, rings the New York Stock Exchange opening bell before his bank’s IPO begins trading, Nov. 7, 2019. (AP Photo/Richard Drew)