9 Nov, 2022

Silvergate Capital, Signature Bank stocks tank in customer FTX fallout

Shares of Silvergate Capital Corp. and Signature Bank continued to plunge Nov. 9 as their customer, cryptocurrency exchange FTX Trading Ltd., is allegedly facing a liquidity crunch.

Silvergate and Signature hold fiat balances in omnibus accounts on behalf of customers at the U.S. division of FTX. Evolve Bank & Trust also holds fiat balances in the virtual accounts of FTX.US customers, according to a disclosure on the website of FTX.US.

Silvergate's shares plummeted more than 30% from its Nov. 7 closing price and were trading at $35.20 as of 3:45 p.m. ET. Signature's shares dropped by about 10% during the same time period and were trading at $133.31 per share as of 3:45 p.m. ET.

BTIG analysts Mark Palmer and Andrew Harte noted that FTX Trading was reportedly facing a bank run amid the sell-off of FTT, the token native to FTX. It was triggered by an announcement on Twitter on Nov. 6 by Binance Holdings Ltd. founder Changpeng Zhao, saying Binance has decided to liquidate the remaining FTT on its books.

Palmer and Harte thought the reaction to Silvergate's shares was overdone. "Given our understanding of [Silvergate's] business model, including its Silvergate Exchange Network (SEN) and its SEN Leverage platform, we struggle to understand how the FTX news could impact the company to the extent implied by the decline in its stock price," the analysts wrote Nov. 8.

Silvergate neither holds FTT nor lends against them, according to the analysts, citing Silvergate President Ben Reynolds. The executive said FTX's challenges have had no direct impact on Silvergate, the analysts noted in the report.

FTX is "among the most prominent users" of Silvergate's SEN Network, which facilitates payments for cryptocurrency exchanges and traders between their Silvergate accounts and the accounts of other Silvergate clients. However, Silvergate does not disclose the amounts of deposits that individual clients have on the SEN Network, the analysts said.

Silvergate lends to cryptocurrency exchanges using crypto-assets as collaterals, through its platform SEN Leverage. Reynolds told the analysts that "all of the platform's loans are significantly overcollateralized by bitcoin that could be liquidated to cover those exposures if necessary."

"As a prudentially regulated bank, we manage our balance sheet to provide liquidity for our clients while maintaining a strong capital position in excess of the well-capitalized status required by federal banking regulations," Silvergate CEO Alan Lane said in a statement Nov. 9.

In a similar bank run, cryptocurrency lender Voyager Digital Ltd. filed for bankruptcy in July and was ordered by the court to return up to $270 million to its customers in August. Voyager's bank Metropolitan Commercial Bank posted a $485.9 million decline in crypto-related deposits during the third quarter, driven by the deposit outflow caused by Voyager as well as the bank intentionally exiting cryptocurrency banking.