Will crypto-friendly Silvergate survive after losing 900 million?
The U.S. crypto-friendly bank Silvergate announced its official financial report for 2022 yesterday, revealing a cumulative loss of $949 million for the year, marking its largest loss ever. Silvergate's stock has been heavily shorted, leading to concerns about the bank potentially facing bankruptcy. Aside from layoffs, what measures has Silvergate taken to survive while still maintaining faith in the crypto industry?
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Background Overview
The U.S. crypto-friendly bank Silvergate saw a significant decrease in digital asset deposits, dropping from $11.9 billion on September 30, 2022, to $3.8 billion on December 31, 2022, amidst its largest client FTX's bankruptcy and the overall panic-driven selloff in the crypto industry, resulting in a massive outflow of $8.1 billion, equivalent to two-thirds of the deposits.
On January 5, Silvergate released its fourth-quarter financial highlights, revealing a sale of $5.2 billion in bonds for cash flow, leading to a $718 million loss and a drop in stock price to the IPO price. Besides the significant layoffs and bond sales announced earlier, what other preparations has Silvergate made to continue surviving in the depressed crypto bear market?
Assets Shifted to Higher Liquidity to Address Selloff
From the quarterly asset comparison table below, we can see that after coping with the selloff crisis, Silvergate shifted a significant amount of assets from Securities available-for-sale to higher liquidity assets such as Interest earning deposits in other banks and Cash and cash equivalents.
Various Capital Ratios
In the financial report, Silvergate emphasized the health of its capital ratios. The Basel III sets a minimum requirement of 3% for the Tier 1 leverage ratio. Since 2018, the U.S. Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have imposed higher leverage ratios on banks and bank holding companies with combined total assets exceeding $700 billion or managed assets over $10 trillion, requiring an additional 2% buffer to reach 5%.
Additional data from the financial report shows that Silvergate's Tier 1 leverage ratio has significantly decreased from over 10% to 5.12%. While Silvergate's scale does not fall under the 5% requirement, overall, it still meets the regulatory standard of being "well capitalized."
Note: Tier 1 capital is a bank's core capital composed of the most stable and liquid capital, serving as the most effective capital to absorb losses during financial crises or economic downturns. Hence, many measures of bank capital adequacy are based on Tier 1 capital.
$43 Billion Federal Home Loan Bank Loans
Earlier reports indicated that Silvergate held $43 billion in Federal Home Loan Bank advances as wholesale funding, referring to it as a lender of last resort, a view that is not necessarily agreed upon.
The Federal Home Loan Banks, established in 1932 as government-sponsored enterprises, primarily provide financial products and services to member financial institutions. Over time, the system has evolved into a broader funding source for various financial institutions, including commercial banks and insurance companies. These banks are significant players in the U.S. money markets, issuing securities to raise funds from money market and other investors while also lending to banks and insurance companies.
According to the latest data from the Federal Reserve Bank of St. Louis, the Federal Home Loan Banks currently have total borrowings of $660.8 billion. Silvergate's $43 billion accounts for only 0.6%, which is insignificant, reflecting a normal financing method for banks rather than a bailout channel.
However, borrowing from the Federal Home Loan Banks comes with specific conditions. In an environment where bond market value reductions occurred significantly last year, at least 77 small banks were unable to access cheaper funds through the Federal Home Loan Banks.
From the publicly available data by Silvergate, it is unclear about the terms of its borrowing from the Federal Home Loan Banks. When was the $43 billion borrowed? When is it due? And post-selloff, does Silvergate still qualify for the borrowings?
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Will Silvergate Be the Next Bank to Fail?
According to the analysis firm S3 Partners' short-interest indicator, Silvergate surprisingly ranks first, with 53.24% of its stock being borrowed for short selling. Do people believe Silvergate will be the next bank to fail?
From the balance sheet disclosed, the assets in the red box on the asset side, Cash and cash equivalents and Securities available-for-sale totaling $10.3 billion, are enough to cover all deposits of $6.2 billion below.
The shareholder equity remains positive at $600 million, showing no signs of insolvency. Even in the worst-case scenario, Silvergate falls within the insurance coverage of the Federal Deposit Insurance Corporation (FDIC), with each depositor having a guaranteed amount of $250,000.
However, after enduring the severe selloff caused by the crypto industry, will Silvergate continue to position itself as a crypto-friendly bank? Will this event attract regulatory attention, leading to higher liquidity ratios or stricter regulatory conditions? These will be ongoing focal points for us to monitor.
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