3/3/2023: Silvergate Bank is in Deep Deep Trouble
3/3/2023: Silvergate Bank is in Deep Deep Trouble
Game over, Silvergate.
In a SEC filing two days ago, Silvergate Capital, the parent company behind Silvergate Bank said they have to delay filing of their annual report and they might not be able to continue as a going concern.
As far as I know, Silvergate is one of the only two banks that work as crypto to fiat ramps in the United States. (The other being Signature bank.) But since the great crypto meltdown in 2022, things have been rocky and they are in a very dire situation. Matt Levine had a great writeup on how Silvergate spiraled into the current situation. It’s a pretty complicated story but let me try to summarize below:
Silvergate worked with many crypto exchanges and crypto investors as shown above. At the end of Q3 2022, they had $13.2 billion of crypto deposits, out of which, $12B of the deposits are non-interest bearing.
At the end of Q4 2022 after the FTX/Alameda collapse, the crypto noninterest bearing deposits went down to $3.9B due to investors withdrawing money from crypto exchanges. Silvergate effectively had a bankrun and needed $8B to meet the withdrawal requests.
Silvergate was forced to sell assets (i.e. treasuries) at a loss to meet withdrawal requests. They had a net loss of $1.5B in Q4 2022.
Their shareholder equity went from $1.3B to $571.8M due to the losses.
Its regulatory leverage ratio was ~5.1% at the end of Q4 2022 due to the lower shareholder equity .
The regulatory requirement of the leverage ratio is 5%. If they lose another $20M, they might be below that 5% threshold and they could be forced into a receivership. Frankly, with the rate Silvergate is losing money, they could easily become insolvent.
In the meantime, investors are pulling deposits out of Silvergate due to the leverage ratio and insolvency concerns, which makes things worse. Coinbase and Circle cut ties with Silvergate after the SEC filing.
WOW! What a mess! At this point, I think Silvergate is done. Signature Bank is still standing but it probably doesn’t take much for them to decide that the crypto-to-fiat business is not worth it. If no regulated US banks would work with crypto institutions, what will happen to crypto? Is crypto still worth it if people cannot convert their crypto tokens to actual dollars? Hopefully, we will get some answers to these important questions in the next few months.
Update:3//8/2023: Silvergate Bank is shutting down… as expected.
