Silvergate Exodus gets worse after bank questions its own survival

(Bloomberg) – The difficulties of Silvergate Capital Corp. deepened on Thursday, a day after the bank raised questions about whether it could stay in business, with shares plummeting to record lows and key partners severing ties. with bank-friendly cryptocurrencies.

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The bank sounded the alarm with a filing on Wednesday that said the losses could leave Silvergate with less capital than it needs and it is assessing its ability to continue as a going concern.

Investors and business partners headed for the exits, with shares down as much as 50%, while Coinbase Global Inc., Galaxy Digital Holdings Ltd. and Paxos Trust Co. decide to stop accepting or initiate payments through Silvergate. The exodus could threaten the bank’s main source of deposits and a platform for crypto participants to transfer funds to each other.

“In light of recent developments and out of an abundance of caution, Coinbase no longer accepts or initiates payments to or from Silvergate,” Coinbase said on Twitter. “Coinbase will facilitate institutional customers’ cash transactions with our other banking partners.”

Galaxy Digital, the crypto financial services company founded by Michael Novogratz, said it continues to have no exposure to Silvergate. A company spokesperson said in an email that the company has taken action “to ensure customer and company assets are safe as part of our robust risk management process.” . Paxos made a similar statement.

Silvergate said Wednesday that it was unable to file its annual report on time with the Securities and Exchange Commission, which prompted at least three analysts to downgrade their ratings. Canaccord Genuity Group Inc. downgraded the bank to holding, while JPMorgan Chase & Co. downgraded the stock to underweight and Compass Point Research & Trading LLC downgraded it to neutral. Morgan Stanley analyst Manan Gosalia, who had a sell-equivalent rating on the stock, removed his price target altogether, citing a “high degree of uncertainty” surrounding the company.

JPMorgan said Silvergate is facing ongoing challenges to its liquidity and that its tier 1 leverage on the parent company is 5.36%, just “slightly above market cap”. good is 5%.

J. Austin Campbell, an associate professor at Columbia Business School who runs an independent consulting business for crypto companies, said: “People were really scared after that news and it was hard to let go. say it’s not fair. “If you look back to 2008, when partners started missing regulatory reports or SEC filing deadlines, that was a very bad sign.”

Campbell said he has been contacted by no less than five crypto players, including trading firms, asset management firms and crypto projects, for advice on where they should move their bank accounts. row.

Policy debate

“Silvergate is working hard to file a 10-K as soon as possible and has no further comment at this time,” a spokesperson said Thursday, referring to the overdue report. The stock was down 46% by midday in New York.

The unstable state of the bank, which holds federally insured deposits and more than $11 billion in assets, will add fuel to the debate between US lawmakers and regulators over whether whether banks can manage the risks that come with digital assets.

“That confirms the concerns many regulators have had,” said Todd Baker, a senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy. “If this bank fails, it will be seen as an example of why banks should be extremely cautious in dealing with crypto companies.”

Even if that doesn’t happen, Silvergate’s difficulties will prompt regulators to be more cautious, he said.

In early January, three leading financial regulators — the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation — issued a blunt warning to banks that Uncontrollable crypto-related risks should not be allowed. infect the banking system.

Silvergate added to the debate over US policy when it revealed in January how it would stabilize its balance sheet after selling billions of assets to pay depositors. At the end of last year, the company held $4.3 billion in short-term advances from the Federal Home Loan Bank, a program originally set up under President Herbert Hoover to boost lending. Mortgage.

On Wednesday, Silvergate listed a Justice Department investigation and increased regulatory oversight among factors that could ultimately affect financial results.

“The best we can say, this is not a savings and loan crisis,” said Ian Katz, chief executive officer of Capital Alpha Partners. “It seems pretty isolated.”

If the negative impact on the banking sector is limited, regulators will see it as a testament to the approach they’ve taken, says Katz.

However, Silvergate’s current predicament will make other banks more reluctant to partner with crypto projects, leading to a negative impact on that industry, said Henry Elder, head Head of decentralized finance at digital asset management firm Wave Financial.

“They are crypto banks,” Elder said. “You definitely won’t see anyone coming out as a crypto bank until more information becomes clear.”

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