Crypto carnage continued this week as one of the pioneering banks in cryptographic asset custodianship, Silvergate Capital Corporation (NYSE: SI) d/b/a Silvergate Bank, pre-announced select fourth quarter financial metrics which disclosed a massive outflow of digital asset deposits. For the period between September 31st and December 31st 2022, Silvergate’s deposits dropped from $11.9 billion to $3.8 billion. As reported by the Wall Street Journal, the withdrawals forced the bank to liquidate $5.2 billion of debt at a loss of $718 million – more than Silvergate’s aggregate profits since 2013. Silvergate is one of less than a handful of financial institutions that specialize in custodial and exchange services for institutional players in the crypto ecosystem, a group that also includes PA-based Customers Bank (NYSE: CUBI) and NYC-headquartered Signature Bank (NASDAQ: SBNY). I wrote about these banks in October of 2021 with respect to them being pioneers in the implementation of a new ethereum-based blockchain protocol to facilitate real-time, tokenized, account-to-account payments for business customers. Silvergate and its cohort represent the first movers among traditional financial institutions to convert to, and proselytize for, the mainstream usage and application of cryptographic currencies and blockchain for B2B banking, collateralized lending, and payments.
It’s no coincidence that Silvergate’s problems are tied to November’s implosion of FTX, almost to the day when Coindesk first exposed the interdependence of FTX and its affiliate crypto-hedge fund trading firm Alameda Research LLC. Silvergate had direct exposure to both Sam Bankmand-Fried owned firms to the tune of roughly $1 billion in assets. At the time, Silvergate CEO, Alan Lane, when questioned at the Oppenheimer Blockchain and Digital Assets Summit about what the FTX collapse-induced volatility in crypto markets meant for the bank proclaimed, “suffice it to say, whether deposits are up or down, we have the liquidity and the capital ratios to support the volatility.” On December 5th, Lane issued a public letter to investors to address the continuing concerns regarding the bank’s FTX exposure in which he said, “our entire investment securities portfolio can be pledged for borrowings at the Federal Home Loan Bank, other financial institutions, and the Federal Reserve Discount Window – and can ultimately be sold should we need to generate liquidity to satisfy customer withdrawal request”.
The takeaway from Silvergate?
We’re good. We got this.
Now, compare Lane’s position to that of Signature Bank’s COO, Eric Howell, as reported by the Financial Times on December 6th, just a day after Silvergate issued its letter to investors.
Signature is one one of the largest federally chartered banks to custody cryptographic assets.
Per the Times, “Signature Bank plans to offload as much as $10 billion in deposits tied to the cryptocurrency industry…About 23 percent of Signature’s $103 billion in customer deposits were related to the crypto industry as of the middle of November. It is now seeking to reduce the share to less than 20 per cent and eventually less than 15 percent of total deposits”.
Also, stated Howell, “We’re not just a crypto bank and we want that to come across loud and clear”.
Takeaway?
The different approach taken by these two banks in response to the crypto carnage caused by FTX’s collapse is dramatic. And that’s why I think the Silvergate story from this week is so interesting.
A bank’s primary function is to store and protect customer assets (custody) and make loans, and it can’t do the latter without properly doing the former. This is why banks tend to be highly risk averse and conservative in nature.
In the case of Silvergate Bank, management’s approach to the FTX implosion was rather cavalier and non-reactive, suggesting they weren’t going to actively mitigate risk because they were properly positioned to backstop any exposure.
This is surely reasonable – they were aware of the risk and had a plan to deal with it – but not very conservative.
Signature Bank took a different tack. They were proactive in liquidating risky crypto assets to preempt losses from potential FTX contagion. And, look at the way Signature Bank has been rewarded for its more prudent and conservative approach.
Between November 9th and January 6th, Signature Bank’s share price has traded-down roughly 12%.
Silvergate?
65%
