Here’s Why Silvergate Collapsed

Martin J. Gruenberg of The Financial Insurance and Deposit Commission (FDIC) delivered a speech “Oversight of Prudential Regulators” before the United States House of Representatives’s Committee on Financial Services.

In it, he explained the reasons why the Silvergate Bank collapsed, thoroughly examining the situation. 

The primary cause, according to the FDIC Chief Risk Officer’s report, was “illiquidity precipitated by contagion effects in the wake of the announced self-liquidation of Silvergate, on March 8, 2023, and the failure of SVB, on March 10, 2023, after both experienced deposit runs.”

Poor management, however, played the root cause, with Signature Bank’s board of directors and management pursuing rapid and unrestrained growth at the expense of “developing and maintaining adequate risk management practices and controls appropriate for the size, complexity, and risk profile of the institution.”

Furthermore, the management did not stress good corporate governance practices or interact with the FDIC in a proper manner.

It appears from the report that in pursuit of rapid growth, the company excessively relied on uninsured deposits. It also did not factor in the risks of its association and reliance on crypto industry deposits as well as its vulnerability to the market fluctuations.

Commenting on the overall state of the banking industry, Gruenberg said that it has proven to be pretty resilient. To that end, the first quarter of 2023 reports indicate that the first quarter aggregate bank net income was similar to that of  the fourth quarter if one doesn’t take into account  “the effects on acquirers’ incomes from their acquisitions of failing banks. 

Other metrics also bode well for the industry.

To remind, following the collapse of the Silvergate bank Bitcoin slid 7% to $20,474.50. It is trading at just above 25 thousand press-time.

Previously, Gagarin News reported that the US Congress advises to encourage Bitcoin mining.