Crypto Bank Silvergate Sees Massive Amount This is Withdrawals

Conservative News DailyJanuary 7, 2023

(Bloomberg) — When During the financial crisis, US banks collapsed like dominoes. Great DepressionThe cause was often a classic run. Depositors In fear of huge losses on bad loans or investments, many people withdrew cash in large numbers.

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The cryptocurrency era just put a new twist on that — with the depositors running into trouble first.

Silvergate Capital Corp., California Lender that offers digital-asset entrepreneurs a place to store their cash, jolted shareholders Thursday It was also revealed that it had just survived a $8.1 billion drawdown on deposits. That’s roughly 70%, even more severe than runs seen in the Depression. But In this instance, the bad bet was made by the depositors, a list of crypto entities that includes parts of Sam Bankman-Fried’s doomed FTX empire.

“This is unprecedented, it’s very unusual,” Karen PetrouManaging partner at Federal Financial Analytics, WashingtonResearch firm that is based in the United States. “Because they were so dependent on crypto funding, they were vulnerable for a run. Given the crypto market has been unstable, they got it.”

Bank She stated that regulators will be taking a closer look at such cases.

IndeedThis week, the Federal Reserve, Federal Deposit Insurance Corp. The Office You can find the Comptroller You can find the Currency A joint warning was issued to all banks that deal with crypto companies, expressing concern about business models that are too focused on crypto-related activities.

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” According to regulators.

Silvergate expressed confidence in its liquidity as well as its ability to move on, a belief supported by several. Wall Street analysts. But Silvergate’s disclosure — which included selling assets at a loss to raise cash — sent its stock tumbling, bringing its total slide to more than 90% since the end of 2021, the year Bitcoin It has surpassed all records.

The On another day, shares plunged FridayAnalysts warned that the deposit run might not be over, and the stock dropped as high as 14% The JPMorgan analysts include that balances could be heading back to 2020 levels, before the bull run in crypto price, and could even be heading back to 2020 levels. Steven Alexopoulos In a research note, I wrote that short sellers were also mentioned Twitter This could have made things worse by spooking depositors.

Silvergate is still vulnerable because almost all the bank’s deposits are from crypto-centric institutions, and continued large outflows could hurt the bank’s financial condition, according to Moody’s Investors Service. The The deeply distressed price of Silvergate’s preferred securities, which trade at about 40 cents on the dollar. Bloomberg Intelligence The 5.375% interest payment could be in danger

In Other bank crises of modern times, such as 2008’s credit crunch. Bear Stearns Cos. And Lehman Brothers Holdings Inc., problems began as souring loans and other assets chewed holes in lenders’ balance sheets. As These losses were so severe that funding sources panicked, and they pulled away.

Selling Assets

But In Silvergate’s case, the firm made relatively few loans. Regulatory The vast majority of its $15.5 Billion balance sheet at the close of filings shows September was comprised of securities issued or backed by the US government or municipalities — generally considered relatively safe and easy to unload.

InsteadThe pressures began on the other side. Silvergate’s balance sheet. Almost 94% of the firm’s liabilities were deposits, with about $11.9 billion from digital-asset customers. That This figure fell to $3.8Billion at the end the fourth quarter.

To Keep up with outflows Silvergate Nearly half of the company’s securities portfolio had to be sold. $5.2 billion worth of debt securities was liquidated for cash. In In that rush, it suffered $718 million in losses. The According to the firm, it expects more hits from securities sales in order to reduce its $6.7 Billion wholesale borrowings.

Spurring customers’ retreat was the collapse of Bankman-Fried’s FTX exchange operator and his Alameda Research An investment company was accused of covering up billions of dollars worth losses. That rattled the public’s confidence, sent prices of digital assets tumbling and cost FTX customers and crypto investors around the world. Bankman-Fried He pleaded not guilty for fraud charges.

Huge Pause

Amid In the midst of the turmoil, some institutional customers pulled deposits from Silvergate Accounts and moved to less risky positions, taking a “huge pause” From crypto Silvergate Chief Executive Officer Alan Lane According to analysts, this was said during a conference call.

“We had clients that were proprietary traders, market makers that had been doing business with each other for sometimes six to eight years,” said the firm’s president, Ben Reynolds. “They just stopped doing business with each other and essentially pulled out all their deposits.”

Some Clients needed all the money they could to make ends meet. By Year-end, approximately $150 million Silvergate’s deposits came from clients in bankruptcy proceedings, the bank said.

FTX represented less than 10% of the bank’s deposits. The The US government seizes assets that are not in its possession Silvergate bank accounts tied to one of FTX’s units.

“No bank should be concentrated in one industry,” Todd BakerSenior fellow at the Columbia Business School Columbia Law School A former chief strategy officer at three large financial institutions. Silvergate The price will be below “significant regulatory pressure to diversity its business.”

–With Assistance from Lydia Beyoud.

(Adds Commentary from JPMorgan analyst Moody’s in 11th paragraph.)