Fed findings put Silvergate crash on crypto

The collapse of Silvergate Bank this year has been attributed to various factors, according to a review by the United States Federal Reserve inspectors. Some of the key factors include:

Over-Dependence on Risky Crypto Deposits: Silvergate Bank shifted its strategy to focus on customers engaged in crypto activities in 2013. Over the years, it rapidly expanded to become a prominent bank for crypto clients, with a significant increase in deposits. However, the vast majority of these deposits were uninsured and non-interest bearing. The bank’s over-reliance on crypto assets became a vulnerability, especially when there was a significant outflow of capital from the crypto sector following the collapse of the FTX crypto exchange in November 2022.

Lack of Proper Regulatory Compliance: The review found that Silvergate Bank did not properly follow existing banking regulations. It should have filed a new application with the Federal Reserve due to its significant shift in focus and the risks associated with crypto activities. Government supervisors were criticised for failing to pressure the bank to establish new risk protection measures.

Ineffective Management and Nepotism: The investigation also revealed issues of nepotism within the bank’s senior management, which contributed to an incompetent and ineffective corporate structure. The bank’s governance and risk management capabilities did not keep up with its rapid growth and evolving risk profile. This lack of effective management worsened the bank’s ability to address the risks it faced.

Silvergate Bank voluntarily wound down in March 2023, which means it did not technically fail. This allowed the bank to avoid government intervention and the requirement to repay depositors. The collapse of Silvergate Bank serves as a cautionary tale about the risks associated with over-dependence on a single industry, ineffective management, and inadequate regulatory compliance, especially in the context of the cryptocurrency sector.