By Amy Castor and David Gerard
Silvergate Bank, the US dollar banker to the crypto world, is having issues. The latest red flag: Silvergate is unable to file its 10-K annual report for 2022 on time, and it won’t even be able to meet an extended March 16 deadline.
In a late filing notice to the SEC, the California bank said it was not sure it could survive as a “going concern.” [NT-10-K notice of late filing]
Silvergate is toast. We suspect the FDIC will be swooping in sooner rather than later to sell the bank or liquidate its assets.
Silvergate CEO Alan Lane as he rings the opening bell at the NYSE on Silvergate’s IPO day, November 7, 2019
A crypto-involved non-profitability happenstance
Amongst other reasons for delaying its accounts, Silvergate needs additional time to “complete management’s evaluation of internal controls over financial reporting.”
That is: someone inside the bank may have been fiddling the books. At absolute best, they were sloppy.
Silvergate’s auditors, Crowe LLP, have refused to sign off on the Q4 2022 accounts without considerable further information on just what happened here.
This also means the preliminary Q4 accounts released on January 17 should be treated as wild guesses.
Silvergate’s crypto customers withdrew $8.1 billion in November when FTX collapsed. So the bank had to sell off a pile of assets extremely quickly in December. The ghastly losses that Silvergate realized on these assets mean that the bank may become “less than well-capitalized” — a phrase a bank never wants to say out loud.
Legislators are demanding to know just how Silvergate failed to catch FTX and Alameda’s incredibly obvious bank fraud. This is noted in the NT-10-K as “regulatory challenges.”
Silvergate says it’s “evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements.”
Things have been going downhill for Silvergate ever since FTX blew up in November.
In its Q3 2022 10-Q, Silvergate said that none of its security holdings had “other-than-temporary impairment.” (That sounds like a euphemism, but it’s an official jargon phrase.) So the securities were accounted at face value. [10-Q]
When Silvergate’s crypto customers took out their $8.1 billion, Silvergate was technically solvent — it had loans as assets on its books, such as its bitcoin-secured loans — but it didn’t have the cash to give the customers their money back.
So Silvergate started selling treasuries just as yields were going up. The bank borrowed in the wholesale market as well, including a $4.3 billion short-term advance from the Federal Home Loan Bank of San Francisco — an amount equivalent to roughly 70% of Silvergate’s deposits.
In its interim Q4 filing, Silvergate said it had to move the securities to “available-for-sale.” This meant they promptly had to mark them all to market — and so they took not only massive realized losses on the securities they sold, but had to account unrealized losses as well.
FHLB-SF caught a lot of flack for the loan — a home loan bank is supposed to make loans to promote housing. Silvergate has nothing to do with housing. FHLB-SF put out a press release on January 12 assuring everyone that the loan to Silvergate was secured, and not with crypto. [Press release, archive]
Then FHLB-SF seems to have demanded its $4.3 billion back immediately, rather than rolling the loan over. Frances Coppola suggests to us that the January accounts may have breached the tangible capital rule — which says that banks with negative tangible capital are restricted from accessing capital from the FHLBs. If this ever goes negative by FHLB rules, the bank is no longer eligible for the loan. [LII; ABA]
Professor Cornelius Hurley, who was the director of the FHLB of Boston for 14 years, told us that more than likely FHLB-SF was in talks with the Federal Deposit Insurance Corporation, who may have put pressure on them. “When a home loan bank makes a loan to a member, it does not have to worry about credit quality because if the bank fails, the FDIC suffers the losses,” Hurley said.
So Silvergate was liquidating assets to pay off the FHLB loan, as well as to cover the customer withdrawals. The bank’s preliminary Q4 accounts showed a $1 billion loss up to December 31. Silvergate had to sell off even more assets in January and February.
It’s not clear if Silvergate has actually paid back any of the $4.3 billion loan as yet. Silvergate’s NT-10-K says that it sold off more assets in 2023 “primarily to repay in full the Company’s outstanding advances from the Federal Home Loan Bank of San Francisco.” But FHLB-SF issued a statement (which isn’t yet up publicly) phrased as if the payment hadn’t yet been made, only that there was a “determination” to pay:
As reported by Silvergate Bank on March 1, 2023, Silvergate Bank made a determination to repay all advances outstanding to the FHLBank San Francisco in full … All advances to Silvergate were at all times fully collateralized while they were outstanding.
Update: FHLB-SF confirmed, just after we posted, that Silvergate did in fact pay off the loan in full. [American Banker]
How deeply was Silvergate into crypto?
Deeper than any other bank in the world.
The Bank for International Settlements has published its Basel III bank monitoring report for February 2023. The crypto section of the report starts on page 101 (page 111 of the PDF). This summarizes not just crypto holdings, but crypto exposure. [BIS, PDF]
Total worldwide crypto asset holdings in banks was a mere 1.0 billion EUR, while total crypto exposure was just 2.9 billion EUR.
One single bank makes up 61.7% of total, worldwide “cryptoasset prudential exposures” — that’s almost certainly Silvergate, with their bitcoin-secured loans to MicroStrategy and bitcoin miners.
Frankly, anyone who loans money against a pile of bitcoins deserves everything that happens next.
How’s Signature going?
Many crypto companies have moved their US dollar banking to Signature Bank of New York.
Though even that channel is looking shaky — Binance was cut off from US dollar payments via Signature as of February 1. Kraken is cutting off non-institutional dollar transactions via Signature, and they blame Signature for this. It’s not clear who Kraken will be using for dollar transactions for ordinary customers. [Bloomberg, paywalled; CoinDesk]
Signature has also been propped up with loans from its local FHLB — though at least Signature has other business lines. [Wall Street On Parade]
What happens next
As of Tuesday, Silvergate (NYSE:SI) was the most shorted US stock, with 81% of available shares sold short. (At this moment, $SI is the first or second most-shorted stock.) The stock price crashed from $13.33 yesterday to close at $5.72 today. [Yahoo! News; Marketwatch; Google]
Bank failures in the US are rare. But when a bank does fail, the FDIC moves quickly to protect depositors. In most cases, the FDIC arranges for a healthy bank to buy out the failed bank. [FDIC]
But in this case, it’s unclear if any other bank would want to buy Silvergate. Hurley tells us: “Usually, in a situation, the value is in the deposit base, but most of Silvergate’s deposits were hot crypto money. The bank is tiny. There is not much to it … If you are a healthy bank, why would you want to take over a bank that has scandal written all over it?”
If there are no takers, the FDIC will simply liquidate the assets.
The FDIC insures accounts of less than $250,000. Larger accounts will receive a claim against the failed bank for anything over $250,000. If the FDIC can’t find a larger bank to purchase Silvergate, it will pay out depositors directly. Shareholders will get zero.
We expect a bank run on Silvergate today, and tomorrow if any money is left.
We would be unsurprised if a team of FDIC agents — yes, the FDIC has agents — swoops in on Silvergate’s La Jolla office, and the next day, Silvergate’s customers are at a new bank. NPR did a story a while back, “Anatomy of a Bank Takeover,” that describes the process. [NPR, 2009]
We expect US and worldwide regulators to get even harsher on the idea of banks coming within a mile of crypto.
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