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Elaine Hetrick, Chief Administrative Officer of Silvergate Capital Corporation, recently filed for bankruptcy, attributing Silvergate Bank’s downfall to a “sudden regulatory shift” that forced the institution to close in March 2023.
Silvergate Bank, which primarily served digital asset customers, was the first major institution to fall during the 2023 U.S. banking crisis, alongside First Republic Bank, Silicon Valley Bank, and Signature Bank. These collapses were some of the largest since 2008, shaking the financial industry.
The Rise and Fall of Silvergate Bank
Often referred to as a “crypto bank,” Silvergate had a significant position in the cryptocurrency sector. Despite facing challenges due to the shrinking crypto market and rising interest rates, Hetrick’s filing suggests the bank was still stable and meeting regulatory capital requirements. The bank continued to serve its customers holding deposits at Silvergate.
However, the regulatory environment shifted in early 2023. According to Hetrick, coordinated actions by federal regulators, including the Federal Reserve (FED), the FDIC, and the Office of the Comptroller of the Currency (OCC), signaled that banks with significant exposure to digital assets would no longer be tolerated. This regulatory stance forced Silvergate to reconsider its crypto-focused business model, ultimately leading to its closure.
In her filing, Hetrick detailed how Silvergate grew rapidly by serving the digital asset sector, with deposits skyrocketing from $1.8 billion at the end of 2019 to $14.3 billion by the end of 2021. However, the collapse of major crypto firms like FTX and Three Arrows Capital in 2022 led to a sharp decline in deposits and triggered a bank run. Silvergate was forced to sell long-term bond investments at a loss, managing the situation but still reporting a net loss of $948.7 million in 2022 compared to $75.5 million in net income in 2021.
Regulatory Pressure and Silvergate’s Ultimate Decision
Despite its financial struggles, the filing noted that Silvergate still had assets exceeding its deposits and continued to meet capital requirements in early 2023. However, increasing regulatory scrutiny around the risks of serving crypto-focused customers made it clear that Silvergate’s business model was no longer viable. Federal banking authorities raised “significant safety and soundness concerns” over institutions heavily exposed to the crypto sector, citing liquidity risks as a key issue.
Facing growing regulatory pressure, Silvergate management had three options: distance itself from crypto clients, sell the bank, or shut down operations. After careful consideration, Silvergate chose to close rather than pursue costly alternatives, making it the first mid-sized bank to collapse in 2023.
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