January 6, 2023

Breakingviews: Crypto bank run vindicates watchdogs’ vigilance

by Breakingviews.

Alan Lane’s dreams may have collapsed, but his bank has not. Silvergate Capital, a deposit-taker for cryptocurrency firms, said on Thursday that it had been forced to raise funds in a hurry and flog assets after digital-asset customers pulled almost 70% of their balances. It’s a disaster for Lane and his investors. For the U.S. banking system and households who rely on it, there is much to reassure.

What happened to Silvergate was a classic – and these days rare – bank run. Deposits from crypto firms fell to $3.8 billion in December from $11.9 billion in September. The panic was partly prompted by the failure of bankrupt exchange FTX, one of Lane’s customers. The fact that the government only insures deposits up to $250,000, and institutions are likely to have much more than that in their accounts, doesn’t help. To meet the demand for cash, Silvergate had to sell securities it holds, and tap wholesale funding markets.

While bad, it could have been so much worse. Silvergate hadn’t locked up customers’ deposits in loans, instead stacking its $15 billion balance sheet with government bonds and other easy-to-sell assets. It has around $1.1 billion of approved lending commitments to customers, secured exclusively against bitcoin, but those have registered no losses. Instead of using deposits as lending fuel, Silvergate instead treated them as lubricant for the Silvergate Exchange Network, its payment product – actively discouraging customers from parking more funds than they needed.

Silvergate is an outlier in other ways too. Its equity capital in September was equivalent to roughly 40% of its risk-weighted assets, around four times higher than most big banks. That may be partly down to Lane’s conservatism. But bank regulators too have kept crypto on a tight leash: They warned on Tuesday that they are closely watching banks with crypto-focused business models. Banks can’t hold crypto directly. Silvergate has multiple agencies, from the Federal Reserve to the California financial regulator, breathing down its neck.

Lane’s bank is nonetheless now a wisp of its former self. It has cut around 40% of its workforce, and back-burnered plans to launch a blockchain-based payment product. The shares are down 90% in less than six months. It’s embarrassing for sure. But for now, that’s all it is. If a go-to crypto bank can lose most of its deposits without failing or spreading chaos to other institutions, it suggests the firewall between digital and traditional finance is holding up.

Context News

Silvergate Capital said on Jan. 5 that deposits from cryptocurrency customers had fallen to $3.8 billion as of Dec. 31, a 68% slump that led the bank to sell investment securities, raise new funding and cut its workforce by 40%. Silvergate, which counted bankrupt cryptocurrency exchange FTX among its customers, provides banking services to digital asset companies, including a payment network for institutions called the Silvergate Exchange Network, which had daily volumes of $1.3 billion in the fourth quarter. Chief Executive Alan Lane said that the bank now has $4.6 billion in cash and cash equivalents, exceeding its balance of customer deposits, having raised money from the market and from government-sponsored Federal Home Loan Banks. He attributed the withdrawal in deposits to a “crisis of confidence” in the crypto space. The sale of securities saddles Silvergate with a $718 million loss. It will also take a $196 million impairment charge to reflect the reduced value of technology it had acquired with a view to launching a blockchain-based payment product. Before the announcement, analysts had expected Silvergate to make $124 million of earnings in 2023, according to Refinitiv.

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