In the early 2010s, Silvergate Bank was an ordinary bank unknown to many. However, in recent years, it has gained significant prominence in the world of cryptocurrency. By 2013, the bank had begun focusing on customers dealing in cryptocurrency transactions. Successfully executing this strategy for a while, the company increased its deposits from 1 billion dollars in 2017 to 16 billion dollars in 2021. This growth continued until the bank’s bankruptcy in March 2023.
However, with this rapid growth came increased risks. According to the Federal Reserve’s examinations, a large portion of these deposits was uninsured and non-interest-bearing, which led the bank to become a lender focused on a single sector. Major events in the crypto markets, such as the collapse of FTX, also negatively impacted the bank’s customer base.
Managerial Weaknesses Were the Primary Cause of the Bank’s Bankruptcy
The problems related to the bank losing its customer base were not solely limited to its dependency on cryptocurrency. Managerial mistakes and favoritism played a significant role in the bank’s downfall. Former CEO, Alan Lane, became a target of criticism for appointing several family members to high-ranking positions. However, the Federal Reserve report indicated that, in general, the bank’s capabilities in corporate governance and risk management were unable to adapt to its rapid growth and increasing complexity.
“The bank’s corporate governance and risk management capabilities did not keep pace with the bank’s rapid growth, increasing complexity, and evolving risk profile.”Federal Reserve Report.
Had Silvergate more diligently followed banking regulations, it might not have found itself in this situation. However, the Federal Reserve should also have been more proactive in establishing new risk mitigation measures. Both the bank and the regulators made mistakes during this process, leading to Silvergate’s collapse.