The 2023 Banking Crisis in the United States

The 2023 banking crisis in the United States led to the second-, third-, and fourth-largest bank failures following the 2008 financial crisis: the collapses of First Republic Bank, Silicon Valley Bank, and Signature Bank. However, the first bank to fall was Silvergate Bank, a La Jolla, California-based institution that primarily served clients in the digital assets industry, leading many to label it a “crypto bank.”

In a recent bankruptcy filing, the executive responsible for winding down Silvergate Bank’s holding company argued that, despite the contraction of the cryptocurrency industry and rising interest rates, the bank “…had stabilized, was able to meet regulatory capital requirements, and had the capability to continue to serve its customers who had kept their deposits with Silvergate Bank.”

However, in 2023, a “sudden regulatory shift” from agencies including the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) made it clear that, at least as of the first quarter of 2023, these agencies would not tolerate banks with significant concentrations of digital asset customers. This ultimately prevented Silvergate Bank from maintaining its digital asset-focused business model.

Silvergate’s Collapse: A Timeline

Elaine Hetrick, Silvergate Capital Corporation’s chief administrative officer, provides a timeline leading to Silvergate Bank’s closure on March 8, 2023, just two days before Silicon Valley Bank’s closure and four days before the seizure of Signature Bank by regulators.

Hetrick noted that serving crypto clients helped the relatively small bank grow significantly, with deposits increasing from $1.8 billion at the end of 2019 to approximately $14.3 billion by the end of 2021. Crypto clients represented “substantially all” of the bank’s noninterest-bearing deposits through late 2021 and the first half of 2022.

However, significant collapses in the crypto industry during 2022, such as those of Three Arrows Capital and FTX, led to a contraction in deposits and resulted in a run on the bank, which Silvergate managed by selling long-term bond investments at a significant loss. Consequently, Silvergate’s consolidated business reported a net loss of $948.7 million for the year ended December 31, 2022, compared to a net income of $75.5 million the previous year, largely driven by losses from the sale of long-dated securities impaired by rising interest rates. Despite downsizing to maintain operations, the bank still held assets valued in excess of deposits and met regulatory capital requirements at the beginning of 2023.

In early 2023, increased regulatory scrutiny resulted in an “inflection point” for the bank’s business model. Federal banking agencies, including the Federal Reserve, FDIC, and OCC, expressed “significant safety and soundness concerns” regarding models with concentrated exposure to the crypto sector and liquidity risks facing banks servicing primarily crypto customers.

The increased regulatory pressure ultimately forced Silvergate to consider three options: transforming its business away from crypto customers, selling itself, or winding down operations. After careful analysis, the bank’s management concluded that both transforming the business and pursuing a sale would be too costly, leading to their announcement to wind down operations on March 8, 2023, marking them as the first mid-size bank to do so in the year.

Despite facing unprecedented industry and regulatory pressures, Silvergate Bank did not “fail.” However, the shift in regulatory pressure made continuing its crypto-focused business model impossible, similar to the fate of the shuttered Signature Bank, which demonstrated the intense regulatory pressures on banks in the digital assets industry at that time.

Next Steps

Silvergate’s parent corporation has enough cash to settle multiple lawsuits related to monitoring transactions in compliance with anti-money laundering procedures and expects to fully repay bondholders. The corporation currently holds $163.1 million in cash and equivalent assets, according to the filing, but does not anticipate being able to repay holders of its common stock.

The bank is also engaged in litigation against an activist investor attempting to secure a seat on the debtor’s board to secure payments for shareholders who will receive nothing under the bankruptcy plan.