Bank liquidations, distinct from bank failures, are not unheard of — but several industry experts agree self-liquidation events like Silvergate’s are unusual.
“[These are] very unusual,” John Soffronoff, partner at the consulting firm Capco, wrote in an email. “Even with a bank failure, there is typically an acquiring bank. Based on our research, the most recent [voluntary liquidation] was January 2022, when Marlin Business Bank ceased operations after its parent company sale.”
Unlike most banks, Silvergate heavily relied on crypto-investor-funded deposits, which amounted to 82% of its deposit base as of late 2021. Given the warning signs, some industry experts say regulators could have seen the bank’s demise coming and acted sooner to prevent it.
Karen Petrou, managing partner at Federal Financial Analytics, characterizes Silvergate’s downfall as a regulatory failure to prevent Silvergate from concentrating so much of its deposit base in one business line.
“No bank failure is a regulatory success,” Petrou said. “Silvergate’s ‘voluntary’ liquidation is a failure and then some that could and should have been averted had the agencies taken action on funding-concentration risk and other blinking red lights going back at least a year on the bank’s balance sheet.”
Ian Katz, managing director of Capital Alpha Partners, said that regulators had already made abundantly clear the risks crypto posed, and that Silvergate’s liquidation was well timed for crypto skeptics looking to turn the screws on crypto banks.
“Regulators have already been warning about the dangers of getting involved in crypto, and they will use Silvergate as a cautionary tale,” Katz wrote in an email.
Bart Naylor, a financial policy advocate for Public Citizen, echoed that sentiment, saying regulators and markets can and should use this episode as a reason not to get deeply involved in crypto. But he also said it would probably not lead to new or changed regulations.
“I hope this clarifies the industry’s understanding that bank regulators don’t look kindly on the fake-money business,” Naylor said. “I don’t foresee rule changes; simply enforcement of current law.”
Indeed, all but the most bullish crypto banks have taken steps to limit their exposure to crypto markets. Other major crypto banks like Signature Bank — which recently scaled back its crypto exposure — will be the focus of greater scrutiny and concern because of their exposure to similar assets and clients.
“I’d expect examiners to emphasize two basic tenets of risk management: customer due diligence and third-party risk management,” wrote Soffronoff, who also noted that ultimately Congress will need to enact a regulatory framework to translate existing rules to the crypto space.
“The ball is with Congress to pass laws that direct the relevant agencies to create implementing regulations,” he added.
“I would think the [Federal Reserve] (from a market perspective), the SEC (from an investor protection perspective — although they aren’t securities, there is certainly investment risk), and maybe the [Consumer Financial Protection Bureau] (from a consumer protection perspective)” will have a role to play in a crypto regulatory regime, Soffronoff said. “Ultimately Congress will have to decide.”
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