Crypto Emphasis & Nepotism Cited As Key Factors In Silvergate Bank's Collapse, Says Fed Inspector

Silvergate Bank’s downfall this year can be attributed to two main factors: its excessive reliance on precarious crypto deposits and a pervasive culture of nepotism. This combination resulted in ineffective management, as inspectors from the United States Federal Reserve have reported.

In its Sept 27 executive summary investigating the bank’s collapse, the Office of Inspector General of the Fed Board attributed Silvergate’s demise to a strategic shift in 2013. The strategy change specifically targeted “customers involved in cryptocurrency activities”.

The report emphasized that Silvergate’s heavy reliance on crypto-industry depositors, rapid expansion, and complex funding structure ultimately led to the bank making the decision for voluntary liquidation.

Transforming from an obscure institution in the early 2010s, Silvergate experienced rapid expansion. It emerged as the leading bank for cryptocurrency clients, with its deposits skyrocketing from $1 billion in 2017 to an impressive $16 billion by 2021.

During a phase of rapid expansion, the Federal Reserve observed a noteworthy transition in the bank’s operations. It gradually became a lender primarily focused on a single industry, resulting in most customer deposits being uninsured and non-interest-bearing.

**The Reasons Behind Silvergate’s Voluntary Liquidation – Sourced from the Office of Inspector General**

If the institution had followed the existing banking regulations, a free application would have been mandatory for submission to the Fed. However, government regulators had to apply necessary pressure to ensure the implementation of new risk protection measures.

Silvergate Bank’s Crypto Reliance: Fallout From The FTX Exchange Collapse

Certain government supervisors expressed reservations about the bank’s operations. However, the Federal Reserve stated that these concerns should have been addressed more effectively through stronger and timely supervisory measures.

The detrimental effects of Silvergate’s heavy reliance on cryptocurrency became evident when the defunct FTX crypto exchange collapsed in Nov 2022. This event led to a massive outflow of capital from the sector, resulting in tens of billions of dollars fleeing in the subsequent months.

Investigators discovered that Silvergate’s alleged misconduct went beyond the realm of cryptocurrency. Moreover, they found substantial evidence indicating that nepotism had infiltrated the bank’s senior management, resulting in an ineffective and inefficient corporate structure. However, This framework failed to address the numerous prevailing risks at that time adequately.

Additionally, the bank’s risk management function was compromised due to the presence of nepotism, as observed through numerous familial connections among the senior leadership team.

The report determined that Silvergate’s board of directors and senior management demonstrated ineffectiveness. It highlights the necessity for the bank’s corporate governance and risk management capabilities to align with its rapid growth, increasing complexity, and evolving risk profile.

However, The bank made the decision to wind down voluntarily in Mar 2023, which meant that it did not experience a failure. As a result, government intervention to compel repayment from depositors was unnecessary.

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