Fed Inspector Blames Focus on Cryptocurrencies and Nepotism in Silvergate Bank Alliance ScrgruppEn

Crypto-friendly bank Silvergate ultimately collapsed this year due to over-reliance on risky cryptocurrency deposits and cronyism that led to ineffective management, according to inspectors at the Federal Reserve.

On September 27 exec summary During its review of the Silvergate Bank collapse, the Federal Reserve’s Office of Inspector General pointed the finger at Silvergate’s change in strategy to focus on “customers involved in cryptocurrency activities” in 2013.

“Silvergate’s focus on cryptocurrency industry deposit customers, rapid growth, and multi-layered funding risks led to the bank’s voluntary liquidation.”

Silvergate evolved from an unknown institution in the early 2010s, and has rapidly expanded to become the premier bank for cryptocurrency customers, growing from $1 billion in deposits in 2017, to $16 billion by 2021.

During this period of rapid growth, the Fed said the bank grew into essentially a single-industry lender, with the vast majority of its customers’ deposits being uninsured and non-interest bearing.

Factors leading to the voluntary liquidation of Silvergate. Source: Office of Inspector General

If the institution had been following existing banking regulations correctly, it should have submitted a new application to the Federal Reserve, but government supervisors failed to pressure it to put in place new risk protection measures.

While some government supervisors expressed concerns about the bank’s activities, the Fed said those activities should have been stepped up through “stronger, faster, and more decisive supervisory actions.”

Silvergate’s over-reliance on cryptocurrencies suddenly became apparent after the collapse of now-defunct cryptocurrency exchange FTX in November 2022, with tens of billions of dollars in capital fleeing the sector in the following months.

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The alleged Silvergate errors were not limited to just cryptocurrencies. Investigators also claimed that nepotism plagued the banks’ top management, resulting in an inefficient and ineffective corporate structure that failed to address the numerous risks that existed at the time.

“Furthermore, nepotism, manifested in numerous familial relationships among members of the bank’s senior leadership team, undermined the effectiveness of the bank’s risk management function.”

“Silvergate’s board and senior management were ineffective, and the bank’s corporate governance and risk management capabilities did not keep pace with the bank’s rapid growth, resulting in increased complexity and sophistication of risks,” the report concluded.

The bank voluntarily wound down its business in March 2023, meaning the bank did not technically fail. This meant that the government did not have to step in and force them to repay depositors.

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