April 19, 2024
Latest Cryptocurrency News

Crypto and Nepotism Blamed in Silvergate Bank Collapse – Fed Inspector

Crypto-friendly Silvergate Bank collapsed this year due to excessive reliance on risky crypto deposits and issues related to nepotism within its management, according to inspectors at the Federal Reserve.

In a September 27 executive summary of its review into the collapse of Silvergate Bank, the Federal Reserve Board’s Office of Inspector General highlighted the bank’s shift in strategy toward serving “customers engaged in crypto activities” in 2013.

“Silvergate’s concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks led to the bank’s voluntary liquidation.”

Silvergate, which initially operated in relative obscurity in the early 2010s, expanded rapidly to become a leading bank for crypto clients, with deposits growing from $1 billion in 2017 to $16 billion by 2021.

During this period of rapid expansion, the Federal Reserve noted that the bank essentially became a single-industry lender, with most of its customer deposits being uninsured and non-interest-bearing.

Had the institution properly adhered to existing banking regulations, it should have submitted a new application to the Fed. However, government supervisors failed to exert adequate pressure to establish new risk protection measures. While some government supervisors had expressed concerns about the bank’s activities, the Fed believed these concerns should have been escalated through “stronger, earlier, and more decisive supervisory action.”

Silvergate’s excessive reliance on crypto became apparent following the collapse of the now-defunct crypto exchange FTX in November 2022, resulting in tens of billions of dollars leaving the sector in subsequent months. The issues at Silvergate extended beyond crypto, as investigators also alleged that nepotism had a negative impact on the bank’s senior management, resulting in an ineffective corporate structure that failed to address the numerous risks at hand.

“Further, nepotism, evidenced in the several familial relationships among members of the bank’s senior leadership team, undermined the effectiveness of the bank’s risk management function.”

The report concluded, “Silvergate’s board of directors and senior management were ineffective, and the bank’s corporate governance and risk management capabilities did not keep pace with the bank’s rapid growth, increasing complexity, and evolving risk profile.” The bank opted for voluntary liquidation in March 2023, avoiding a formal failure and the need for government intervention to repay depositors.

Image by pikisuperstar on Freepik

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