Episode Summary
Executive Summary: The episode explains Silvergate Bank’s rise as a key dollar-to-crypto banking intermediary and its collapse after crypto customers withdrew deposits following the FTX failure. Although Bitcoin-backed lending was not identified as the main source of losses, concentrated exposure to crypto clients, deposit outflows, and rising-rate losses on bond holdings weakened the bank’s capital. The discussion also links Silvergate’s failure to broader concerns about banks’ bond portfolios, including Silicon Valley Bank.
Main Topics: Silvergate’s transformation and role in crypto: The San Diego real-estate lender pivoted toward crypto after engaging with industry founders, becoming a major regulated banking link between dollars and crypto firms. Its Silvergate Exchange Network enabled dollar transfers around the clock. Why crypto firms needed specialized banking: Traditional banks often viewed crypto-related funds as difficult to diligence for anti-money-laundering purposes and avoided the business. This created demand for Silvergate among exchanges, stablecoin providers, and investors seeking dollar services. Deposit run after the FTX collapse: As trust in crypto exchanges fell, their customers sought withdrawals, prompting crypto firms to pull deposits from Silvergate. The bank faced a liquidity crisis even though the initial withdrawals reflected concerns about its customers and the crypto sector, not necessarily Silvergate itself. Bond losses, liquidity measures, and capital pressure: Silvergate sold securities to meet withdrawals as interest-rate increases reduced their market value. Losses, asset reclassification, and further expected impairments weakened its regulatory capital; borrowing from the Federal Home Loan Bank also attracted political scrutiny. Crypto lending was not presented as the primary failure mechanism: Silvergate offered Bitcoin-collateralized loans, but the episode says these loans were reported as performing and were not the main source of the bank’s crisis. The central vulnerabilities were concentrated deposits and the interaction of outflows with bond-market losses. Broader banking risks and Silicon Valley Bank: The episode compares Silvergate’s securities losses with Silicon Valley Bank’s reported loss on a bond sale, highlighting how pandemic-era deposits invested in long-duration securities became vulnerable when rates rose.
Key Arguments: Silvergate’s core value to crypto businesses was access to regulated U.S. banking and rapid dollar transfers at a time when many other banks were unwilling to serve the sector. Silvergate’s concentrated customer base made it vulnerable to a crypto-sector shock: after FTX’s collapse, crypto firms’ customers withdrew funds, and those firms in turn withdrew deposits from Silvergate. The bank’s Bitcoin-collateralized lending was not described as the principal cause of failure; the episode reports that SEN leverage loans were performing without losses or forced liquidations at the time cited. Rising interest rates compounded deposit outflows by reducing the value of Silvergate’s bond portfolio. Selling securities to meet withdrawals crystallized losses and further weakened capital. Silvergate’s failure illustrates that a bank run can be driven by loss of confidence in a concentrated customer sector, even before depositors lose confidence in the bank itself. The same rate-risk concern extended beyond crypto-focused lenders: Silicon Valley Bank’s securities sale and capital raise drew attention to unrealized or realized losses in other banks’ long-duration bond portfolios.
Data Points: Deposits at the last U.S. bank failure before Silvergate: $69 million - The episode says a small Kansas bank failed in 2020, at an FDIC cost of $18 million. Silvergate deposits at year-end 2022: More than $6 billion - The episode says this could place Silvergate among the 50 largest U.S. bank failures by deposits in FDIC history. Silvergate stock appreciation after its 2019 public listing: 1,580% in about one year - The episode attributes the rise to Silvergate’s growing role as a connection point between dollars and cryptocurrencies. Customer withdrawals reported by Silvergate: More than $8 billion - The episode says Silvergate reported substantial withdrawals in January, forcing it to sell held-to-maturity assets and incur losses. SEN leverage commitments: $1.1 billion - Silvergate reported this amount in January and said the loans continued to perform as expected, with no losses or forced liquidations. Silvergate securities and loans: About $11.4 billion in securities and $1.4 billion in loans - Approximate balance-sheet figures cited for September 2022. Silvergate deposits, September to December 2022: From $13.2 billion to $3.9 billion - The episode describes the decline in non-interest-bearing deposits as crypto customers withdrew funds. Federal Home Loan Bank borrowing: $4.3 billion - Silvergate borrowed from the Federal Home Loan Bank of San Francisco while meeting liquidity needs. Silvergate fourth-quarter securities-sale loss: $751.4 million - Loss reported for the fourth quarter of 2022 as securities were sold or reclassified amid withdrawals and rising rates. Additional securities impairment charge: $134.5 million - Recorded in connection with an estimated $1.7 billion of securities Silvergate expected to sell in the first quarter of 2023. Regulatory capital thresholds discussed: 4% adequately capitalized; 5% well capitalized - The episode gives these as general minimum capital ratios and says a further $19 million loss could push Silvergate below the 5% threshold. Silicon Valley Bank securities sale: $21 billion portfolio; roughly $1.8 billion loss - The episode says SVB sold the portfolio in response to declining deposits and announced a share sale to strengthen capital.
Pivotal Quotes: "Life as a crypto firm can be divided up into before Silvergate and after Silvergate." — Sam Bankman-Fried, quoted from a former Silvergate website testimonial: The host uses the testimonial to illustrate Silvergate’s importance to crypto firms during the boom. "The problem was the crypto customers whose own customers no longer trusted them." — Patrick Boyle: This captures the episode’s explanation of how crypto-sector withdrawals flowed through to Silvergate. "Rising interest rates caused the deposits to evaporate at the same time as the assets backing those deposits fell in value." — Patrick Boyle: The host summarizes the interaction between falling deposits and declining bond values that intensified Silvergate’s crisis.
Implications: Banks serving concentrated, volatile industries can face rapid deposit outflows even when their loans are performing. Liquidity planning must account for correlated customer withdrawals and interest-rate risk, especially when deposits fund long-duration securities.
From the Episode
Deposits were over $6 billion, possibly ranking it in the top 50 largest U.S. bank failures in FDIC history. Silvergate's importance in the recent crypto boom is possibly best described by a now-deleted testimonial from the bank's website. Life as a crypto firm can be divided up into before Silvergate and after Silvergate. It's hard to overstate how much it revolutionized banking for blockchain companies. Companies. The testimonial was written by a millennial who still lives in his parents' basement playing video games and has had some recent run-ins with the law. His name is Sam Bankman-Freed. I'm told they took it down from their website a few months ago because it doesn't hold the same weight today as it used to. Okay, so let's talk about Silvergate Bank and touch on the general sell-off in bank stocks that we saw yesterday to understand what went wrong. If we go back.
Of big crypto customers, as these customers were able to open up accounts without lying too much. Silvergate dealt with most of the big players in the industry, and they were an actual US-regulated bank with excruciatingly detailed audited financial statements and capital regulation. This meant that your money was safe at Silvergate, unlike at the other venues we just went over. Now, the beauty of dealing with these crypto customers. Crypto exchanges and the band members of Mars Junction was that because you don't have any real competition in this space, you don't really have to pay them any interest on their deposits. You could take the billions of dollars they deposit with you, put it all in treasuries, and you get to keep all of the interest. You'll probably have to spend some of the profits on lawyers to keep the regulators at bay, but overall, you might have a profitable business. But that is, of course, boring.
Group of services for crypto clients. Sheila Baer, who headed up the FDIC during the global financial crisis, told Bloomberg yesterday that Silvergate's troubles are as much, if not more, about traditional banking risks, lack of diversification, maturity mismatches, and so on, as they are about its exposure to crypto. But it can be argued that its exposure to crypto was its lack of diversification. Exposed to the extremely volatile and legally risky crypto industry, and the collapse of that industry, combined with the heat that it drew from the Department of Justice, led to the collapse of Silvergate Bank. Matt Levine at Bloomberg argues that one way to think about the rise and fall of Silvergate is that the crypto boom was at its heart a low interest rate phenomenon. People started speculating in crypto because interest rate. Interest rates were below the rate of inflation, and so Silvergate was hugely exposed to interest rate risk simply because of its exposure to its crypto customers. Its assets, the bonds that it bought, were also interest rate sensitive, and when rates went up, their assets fell in value. So rising interest rates caused the deposits to evaporate at the same time as the assets backing those deposits fell in value.
About Patrick Boyle on Finance
This podcast is all about quantitative finance and financial history. Subscribe to hear about financial markets, derivatives, and how investors use quantitative tools from statistics and corporate finance theory. Included are interviews with some of the most interesting thinkers in finance. Occasional longer form financial documentaries, open up fascinating elements of financial markets history. Patrick Boyle is a quantitative hedge fund manager, a university professor, and a former investment banker. To contact Patrick visit http://onfinance.org Find Patrick on YouTube at: https://www.youtube.com/c/PatrickBoyleOnFinance