(Bloomberg) – When U.S. banks fell like dominoes during the Great Depression, the cause was often a classic race: Depositors withdrew money in droves amid fears that lenders had suffered huge losses on bad debts and investments.
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The era of cryptocurrency has just put a new twist on this – depositors having trouble first.
Silvergate Capital Corp., a California-based lender that offers digital asset companies a place to park their money, rocked shareholders on Thursday with the revelation that it had recently survived an $8.1 billion deposit drawdown. . That’s about 70%, even worse than the races seen during the Depression. But in this case, the wrong bet was made by the depositors themselves, a list of crypto including parts of Sam Bankman-Fried’s doomed FTX entities.
“It’s unprecedented, it’s very unusual,” said Karen Petrou, managing partner of Federal Financial Analytics, a Washington-based research firm. “Because they were so reliant on crypto funding, they were vulnerable during a run. Since the crypto market has been choppy, they get it.
Banking regulators, she said, will take a closer look at such situations.
Indeed, earlier this week, the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued an unusual joint warning to banks that deal with crypto businesses, expressing concerns about business models that are too concentrated in crypto-related activities.
“It is important that risks in the crypto-asset industry that cannot be mitigated or controlled do not migrate to the banking system,” the regulators said.
Silvergate expressed confidence in its liquidity and ability to move forward, a notion backed by several Wall Street analysts. But Silvergate’s disclosure – which included selling assets at a loss to raise cash – sent its stock plummeting, bringing its total fall to more than 90% since late 2021, the year Bitcoin hit a low. record.
Shares slid again on Friday, falling as much as 14% as analysts warned that the filing race may not be over. Balances could return to 2020 levels, before the crypto price surge, JPMorgan analysts including Steven Alexopoulos wrote in a research note, adding that short sellers on Twitter may have worsened the race by scaring depositors.
Silvergate is still vulnerable because nearly all of the bank’s deposits come from crypto-centric institutions, and continued large outflows could hurt the bank’s financial condition, according to Moody’s Investors Service. The concern was reflected in the deeply troubled price of Silvergate’s preferred securities, which trade at around 40 cents on the dollar. Bloomberg Intelligence warned that the 5.375% interest payment could be jeopardized.
In other modern banking crises, such as the 2008 credit crisis that claimed the life of Bear Stearns Cos. and Lehman Brothers Holdings Inc., the problems began as deteriorating loans and other assets tore holes in lenders’ balance sheets. As these losses mounted, the funding sources panicked and pulled out.
Sell assets
But in the case of Silvergate, the company has made relatively few loans. Regulatory filings show that the vast majority of its $15.5 billion balance sheet at the end of September was made up of securities issued or guaranteed by the US government or municipalities, generally considered relatively safe and easy to offload.
Instead, the pressures started on the other side of Silvergate’s balance sheet. Nearly 94% of the company’s liabilities were deposits, with around $11.9 billion coming from digital asset customers. That figure dipped to $3.8 billion at the end of the fourth quarter.
To meet the cash outflow, Silvergate had to sell nearly half of its securities portfolio, liquidating $5.2 billion of debt securities for cash. In this rush, it suffered losses of 718 million dollars. The company said it expects more success as it sells securities to reduce its $6.7 billion in wholesale borrowing.
The collapse of exchange operator Bankman-Fried’s FTX and its investment firm Alameda Research, amid allegations that they had covered billions of dollars in losses, has prompted customers to withdraw. This has shaken public confidence, sent digital asset prices plummeting, and cost FTX clients and crypto investors around the world. Bankman-Fried pleaded not guilty to fraud charges.
huge break
Amid the turmoil, some institutional clients withdrew deposits from Silvergate accounts and switched to less risky positions, taking a “huge break” from crypto, Silvergate chief executive Alan Lane said during a briefing. call with analysts.
“We had clients who were proprietary traders, market makers who had been doing business with each other for sometimes six to eight years,” company president Ben Reynolds said. “They just stopped doing business with each other and basically withdrew all of their deposits.”
Some customers desperately needed whatever money they could muster to make ends meet. By the end of the year, about $150 million of Silvergate’s deposits came from customers in bankruptcy proceedings, the bank said.
FTX represents less than 10% of the bank’s deposits. The US government is seizing assets held in Silvergate bank accounts linked to one of FTX’s units.
“No bank should be concentrated in one industry,” said Todd Baker, senior fellow at Columbia Business School and Columbia Law School and former chief strategy officer for three major banks. Silvergate will face “significant regulatory pressure to diversify its business”.
With the help of Lydia Beyoud.
(Adds comment from JPMorgan analyst, Moody’s in 11th paragraph.)
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