Silvergate: crypto-friendly bank’s failure is led by customers

The cryptocurrency crash has claimed a new scalp. San Diego-based bank Silvergate is winding down operations following a run on deposits. This year’s mini-rally in digital token prices was not enough to soothe clients and regulators spooked by the collapse of FTX, one of Silvergate’s biggest clients. 

Silvergate’s failure brings the disintegration of digital tokens into the regulated US financial system. It also breaks a golden streak for US banks. In 2022 and 2021 no Federal Deposit Insurance Corporation backed bank failed — an unusually long period.

The last failure was Kansas-based Almena State Bank in late 2020. Its deposits were less than $69mn. As of December 31, Silvergate’s were more than $6bn. It is likely to rank among the top 50 largest US bank failures recorded by the FDIC. 

Wind back a decade and Silvergate was a small real estate lender. When it started servicing crypto start-ups, its shares began rising with token prices. It became a key interchange point between dollars and digital tokens for crypto companies like FTX.

By 2018, Silvergate was suggesting that the addressable market for deposits related to digital currencies could be $40bn. Its average deposits peaked at close to $15bn in early 2022. 

Rising interest rates, falling crypto prices and official probes into FTX spelt disaster. The bank’s near $1bn annual loss last year eclipsed net income for the past five years combined. 

On some metrics, Silvergate was well capitalised. At the end of last year it had a common equity tier one capital ratio of 53.89 per cent.

But the speed with which crypto prices turned and customers fled required Silvergate to take out a loan and sell bonds at a loss. The leverage ratio has fallen from 8.29 per cent in December 2020 to 5.1 per cent — close to the minimum.

Silvergate’s failure leaves crypto start-ups in a bind. For all their talk of disrupting traditional finance, they need banks. Tougher regulation and the chilling effect of Silvergate and FTX will leave few willing to lend.

The Lex team is interested in hearing more from readers. Please tell us what you think of the run down of Silvergate in the comments section below