The reason for the new round of "explosion" in the US banking industry has been found: the Federal Reserve suddenly changed its regulatory policy!

FX168 Financial News Agency (Asia Pacific) reported that after the US crypto-friendly bank Silvergate "exploded" and closed down in 2023, its parent company Silvergate Capital filed for bankruptcy on September 19. The company's CEO Elaine Hetrick claimed in the bankruptcy filing that "the Federal Reserve's sudden shift in regulatory policy" was the key reason for the closure.

According to The Block, the US banking crisis in 2023 led to the collapse of the second, third and fourth largest banks in the United States after the 2008 financial crisis. First Republic Bank, Silicon Valley Bank (SVB) and Signature Bank collapsed respectively.

However, the first bank to fail during the crisis was Silvergate Bank, a La Jolla, California-based institution that primarily served clients in the digital asset industry, leading many to refer to it as the “crypto bank.”

In a new bankruptcy filing, executives in charge of liquidating the shuttered Silvergate Bank Holdings argued that the bank “has stabilized, is able to meet regulatory capital requirements, and is able to continue to serve customers who have deposits with Silvergate Bank” despite a shrinking cryptocurrency industry and rising interest rates.

But in 2023, the “sudden regulatory shift” from agencies such as the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) made it clear that these agencies would not tolerate banks with a large number of digital asset customers starting at least in the first quarter of 2023, ultimately preventing Silvergate Bank from continuing its digital asset-centric business model.

Source: Stretto

Elaine's bankruptcy filing statement provides a timeline of events that led to the closing of Silvergate Bank on March 8, 2023, two days before Silicon Valley Bank closed and four days before regulators took over Signature Bank.

Serving crypto clients has helped the relatively small bank swell, she said, “from $1.8 billion in deposits at the end of 2019 to approximately $14.3 billion at the end of 2021.” As of the end of 2021 and the first half of 2022, crypto customers accounted for "almost" all of the bank's non-interest-bearing deposits (i.e., checking accounts).

However, in 2022, a notable collapse in the crypto industry, from Three Arrows Capital to bankrupt crypto exchange FTX, reduced deposits and even triggered a run on banks, and Silvergate was able to sell off long-term bond investments at huge losses. response.

As a result, the bankruptcy filing states that Silvergate's consolidated operations reported a net loss of $948.7 million for the year ended December 31, 2022, compared with net income of $75.5 million for the year ended December 31, 2021, primarily Sales of long-term securities suffered due to rising interest rates.

However, the document mentioned that despite the bank's reduction in size to continue operations, it still held assets worth more than deposits and met its regulatory capital requirements at the beginning of 2023.

According to the document, at the beginning of 2023, increased attention from regulators led to a "turning point" in the bank's business model. Notably, federal banking agencies such as the Federal Reserve, FDIC and OCC issued two statements stating that they had "significant safety and soundness concerns" about the business model of concentrated investment in the cryptocurrency industry, as well as the liquidity risks faced by the bank for serving mainly customers involved in cryptocurrencies.

The increasing pressure from US regulators on banks that serve cryptocurrency customers eventually forced Silvergate to consider one of three options: reshape the business and no longer rely on cryptocurrency customers, sell itself as a going concern, or begin to gradually close the business.

After careful analysis, the bank's management believed that both the cost of reshaping the business and the cost of selling were too high, and announced its intention to close the bank on March 8, 2023, the first mid-sized bank to do so in 2023, the document said.

“Despite unprecedented industry and regulatory pressures, Silvergate Bank has not failed,” the filing states. However, the shift in regulatory pressure will make it impossible to continue its cryptocurrency-focused business, just like the shuttered Signature Bank, whose closure “illustrates the significant regulatory pressures facing banks in the digital asset industry at the time.”

Silvergate’s parent company holds enough cash to settle multiple lawsuits related to Silvergate’s compliance with anti-money laundering procedures for monitoring transactions, and the bank expects to repay bondholders in full. According to the filing, the company currently holds $163.1 million in cash and equivalent assets and does not expect to be able to repay its common stockholders.

The bank also filed a lawsuit against an activist investor who sought to take a seat on the debtor’s board of directors to ensure payments to shareholders who will not receive any returns under the plan, Law360 reported.