May 10, 2024
SJD candidate Mark Warren analyses the demise of US bank Silvergate Bank and the implications for prudential regulation of banks in his article published in the Journal of Banking Regulation, titled "The rise and fall of Silvergate Bank: lessons for prudential regulation of crypto-sector banking".
Silvergate Bank announced its intention to wind down its operations in March 2023. This was followed by the Federal Deposit Insurance Corporation taking over Silicon Valley Bank and Signature Bank just days later, and First Republic Bank in May 2023. Silvergate had transitioned from a typical California commercial bank to a specialist bank for the crypto-asset sector in the preceding years. The normalisation of interest rates during 2022 and the collapse of crypto exchange FTX in November 2022 punctured Silvergate's new business model. Unlike the other three banks, Silvergate did not require FDIC intervention and has repaid its depositors in full.
This paper examines how Silvergate managed its balance sheet both in its rise and fall and the (lack of) responsibility of prudential regulation for its ability to self-administer its liquidation. Further, this paper argues that "the Silvergate model" indicates how banks should be required to manage their exposure to depositors from the crypto-asset sector: matching its deposit liabilities to highly liquid assets.
With the banking industry still to determine the regulatory lessons to be learned from the "US mini-banking crisis" in Spring 2023, this paper aims to contribute to that discussion and ensure that the lessons to be learned from Silvergate Bank are not overlooked.
The paper is accessible here: https://doi.org/10.1057/s41261-024-00243-0