Nepotism and High-risk Crypto Focus Lead to Silvergate Bank's Downfall
Summary:
The Federal Reserve inspectors report that an overreliance on high-risk crypto deposits and nepotism, leading to ineffective management, caused Silvergate Bank's collapse. The bank was accused of not properly following banking regulations. It became dependant on the crypto-dependent customer base and failed to put in place new risk mitigation policies. The bank also suffered from nepotism, which resulted in a failed risk management function. The bank voluntarily wound down in March 2023.
This year, Silvergate Bank, known for its crypto-enthusiasm, inevitably folded under the weight of high-risk crypto deposits and an ineffective management due to favoritism, according to a review by the Federal Reserve inspectors. A September 27 executive overview of their investigation into Silvergate Bank’s failure, revealed by the Federal Reserve Board’s Office of Inspector General, placed blame on Silvergate’s 2013 strategic shift towards clients involved in crypto transactions. They specified that the bank’s overexposure to the crypto-dependent customer base, rapid expansion and complex funding risks eventually led to the bank’s self-imposed dissolution.
Silvergate, a once insignificant establishment seen in the early 2010s, quickly transformed to be the go-to bank for crypto clients, with a growth from $1 billion in deposits in 2017 to an impressive $16 billion in 2021. The Fed reported that during this swift expansion period, the bank essentially became a mono-industry lender, with an overwhelming majority of its customer deposits being non-insured and non-interest yielding.
If Silvergate was operating in accordance with prevailing banking regulations, a new application should have been filed with the Federal Reserve. However, bureaucratic overseers didn't exert enough pressure for it to put in place new risk mitigation policies. While some government controllers did express concern over the bank's activities, the Federal Reserve remarked that their concerns should have been propelled into “robust, prompt, and assertive regulatory intervention" much earlier.
The full extent of Silvergate’s dependence on crypto became starkly apparent with the fall of the now obsolete crypto exchange FTX in 2022, resulting in capital worth multiple billion dollars exiting the sector in the ensuing months. The review also highlighted that Silvergate’s inappropriate conduct extended beyond crypto. The examiners reported that nepotism troubled the bank’s higher ranks, resulting in an inefficient and ineffective organizational structure which failed to effectively manage the multiple risks existing during that time. "Also, favoritism at play, illustrated by multiple family connections within the bank’s senior leadership team, compromised the efficiency of the bank's risk management functions."
“Silvergate’s board and senior management fell short, and the bank’s corporate governance and risk controls failed to catch up with the bank’s accelerated growth, mounting complexities and evolving risk landscape,” read the concluding statement of the report. The bank opted for a self-controlled wind-down in March 2023, thereby, not technically failing, which meant that the authorities didn't have to forcibly intervene and mandate it to refund depositors.
Published At
10/3/2023 5:41:39 AM
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