Silvergate’s shuttering caused by ‘intense regulatory pressure:’ Executive

Silvergate Bank’s parent company, Silvergate Capital, filed for bankruptcy to wind down its business operations last week. Per the filing, Silvergate hasn’t taken any deposits since March of last year. It returned funds to depositors last November.

To put it simply: Silvergate didn’t fail despite the pressures it faced, the filing reveals. But rather because of the “intense regulatory pressure faced by banks in the digital assets industry at the time.”

Elaine Hetrick, the former chief administrative officer at the parent company said in a filing that the sudden post-FTX shift from regulators “made [it] clear that, at least as of the first quarter of 2023, the Federal Bank Regulatory Agencies would not tolerate banks with significant concentrations of digital asset customers, ultimately preventing Silvergate Bank from continuing its digital asset focused business model.”

Hetrick also claims that Silvergate managed the bank run that happened in 2023: “Although Silvergate Bank possessed more than sufficient assets to cover its liabilities to depositors and had no lending or other business relationship with FTX beyond holding deposits and providing bank account services, perception of risk and fear of contagion, likely as a result of the string of cryptocurrency-related insolvency proceedings, led to substantial withdrawals of deposits from Silvergate Bank.”

She added that Silvergate “took decisive action, first to stem the tide of a bank run in the midst of industry crisis, then, following the shift in regulatory approach, in the liquidation of Silvergate Bank in a manner that would protect depositors from suffering losses.”

After the collapse, the Securities and Exchange Commission — in a suit filed last July — claimed the company and executives misled investors in the now-bankrupt bank.

“SCC, [former CEO Alan] Lane, and [former chief risk officer Kathleen] Fraher misrepresented the operational and legal risks facing the Bank by falsely stating in SEC filings and other public statements that the Bank had an effective BSA/AML compliance program tailored to the heightened risks posed by its crypto asset customers,” the SEC alleged.

But it seems that Silvergate had, for all intents and purposes, been compliant with regulators up until they began to take a more unfriendly approach to banks with heavy crypto concentrations.

Hetrick highlighted a January 2023 joint statement from the Federal Reserve, FDIC and Office of the Comptroller of the Currency, all of which advised potential concerns around banks involved with crypto activities. The statement warned against allowing any of the “volatility” to transfer over to the traditional banking system.

Following the statement, according to Hetrick, Silvergate tried to restructure its business as it saw the writing on the wall. Two hundred people were let go as part of the initiative and the firm got rid of its crypto custody services.

But the pressure remained.

That same group of regulators kept the pressure up in February, with another joint statement echoing the one from January.

“Following the rapid contraction of Silvergate Bank’s business, Silvergate Bank had stabilized, was able to meet regulatory capital requirements and had the capability to continue to serve its customers that had kept their deposits with Silvergate Bank,” Hetrick said.

“However, the increased supervisory pressure on Silvergate Bank and other banks focused on servicing crypto asset businesses forced Silvergate Bank to a point where it would have needed to remake its business model away from its focus on crypto asset businesses, seek to sell itself as a going concern in the shadow of the regulatory overhang or begin winding down its affairs with the goal of preserving as much value as possible for stakeholders.”

A modified version of this article first appeared in the daily Empire newsletter. Subscribe here so you don’t miss tomorrow’s edition.

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