Silvergate Capital Corp.'s voluntary liquidation process is being supervised by the state of California, and the company has not entered the Federal Deposit Insurance Corp.'s receivership program at this point, a spokesperson for the California Department of Financial Protection and Innovation confirmed.
Silvergate Capital on March 8 announced that it will liquidate La Jolla, Calif.-based subsidiary Silvergate Bank and plans to fully repay deposits. In another announcement, the California Department of Financial Protection and Innovation, or DFPI, said it will facilitate "the safe and expeditious voluntary liquidation" of Silvergate.
With the liquidation being supervised by the DFPI, it is unlikely that the agency will appoint the FDIC as receiver for Silvergate, at least for now, said John Popeo, partner at financial regulatory advisory firm The Gallatin Group.
FDIC-insured banks that are ordered to close can appoint the FDIC as the receiver of their assets and liabilities, and the agency will liquidate those assets to pay depositors and creditors. If the remaining assets at a closed bank cannot cover its liabilities, the FDIC is obligated to cover up to $250,000 for each depositor, known as deposit insurance.
Typically, the agency would help a closed bank look for buyers to assume liabilities so it does not have to deploy capital from its insurance fund.
"The FDIC is always very protective of its insurance fund," said Ian Katz, managing director at policy research firm Capital Alpha Partners. "That's what they have and what they need to protect depositors."
By having the California DFPI administer the liquidation, Silvergate can get help from the Golden State before it might need to turn to the FDIC. Also importantly, Silvergate is voluntarily liquidating the banking unit, as opposed to being forced to shut down as a failed bank.
Based on the announcements, the Silvergate liquidation process is subject to California law, Popeo said. Under state law, any bank that has voluntarily ceased to do banking business will notify the California Commissioner of Banks and liquidate its affairs. Deposits not paid out to depositors within six months will be relinquished to the California Treasury, whereupon depositors can submit claims accordingly, Popeo said.
If the liquidation is not being conducted safely or in compliance with California law, the commissioner can seize the business and its property and then appoint the FDIC as the receiver, Popeo added.
'Damage is done'
Silvergate's liquidation comes after the cryptocurrency-centric bank got caught up in the crypto industry's liquidity crunch during the fourth quarter of 2022. The collapse of cryptocurrency exchange FTX Trading Ltd. left many of its counterparties in financial distress. Many of those companies, along with FTX, were Silvergate's customers. In addition, a growing number of investors lost confidence in the cryptocurrency industry and pulled back investments.
After deposits declined by 68% in the fourth quarter of 2022, Silvergate started to shrink its workforce and cut product lines. It ultimately discontinued its flagship payments offering, Silvergate Exchange Network, on March 3.
To tackle the severe deposit runoff, Silvergate has been borrowing from costly funding sources and selling securities at a loss. Those moves dragged Silvergate into mounting investigations by regulators and social media campaigns by short sellers, as well as litigation from investors as its stock price fell.
"In our view, Silvergate operated as any regulated chartered bank should, but the damage is done," Canaccord Genuity analysts wrote March 8.
Liquid enough
At the end of the fourth quarter of 2022, Silvergate appeared to have liquidity sources from cash and securities to repay deposits.
As of Dec. 31, 2022, Silvergate had $4.57 billion in cash equivalents and $5.73 billion in total securities against $6.34 billion in total deposits. Those balances have likely since changed, as Silvergate restructured its business. The securities could be further underwater given additional increases in interest rates in the first quarter, but the balances were well in excess of deposits at the end of 2022.
"With most of the remaining securities portfolio likely liquidated to cover deposit returns, book value will likely take another big hit from where it stood" as 2022 ended, Canaccord Genuity analysts wrote.
As it winds down, Silvergate could restore some value of its assets by selling the intellectual property rights of Silvergate Exchange Network, said Sam Haskell, managing member at Colarion Partners, an investment firm focused on bank equity.
"Ultimately, somebody down the road could restart that network," Haskell said. "But it seems as though the crypto ecosystem has a lot of maturing to do."
The company could also sell the assets of the blockchain payment network Diem Group Ltd., which Silvergate acquired in January 2022 for about $167.4 million, Haskell added.
Banks still appear to be interested in cryptocurrency and blockchain technology, but compliance risks are getting so high that banks may not be able to justify them for the return, Haskell said. In a recent example, Atlanta-based Citizens Trust Bank announced a partnership with stablecoin issuer Circle Internet Financial Limited on Feb. 24 to hold $65 million cash reserves for Circle in a bid to drive deposit growth.
"Those deposits themselves are enormously valuable," Haskell said. "And that's why it speaks so loudly that almost no banks are willing to bring those deposits on balance sheet."