Expose: Silvergate Capital Corp. Bad Debts Are Its Deposits, Not Assets

Key Points:

• If Silvergate Capital Corp. fails, it may be the first bank to die because of bad debts rather than bad assets.
• The only reason Silvergate attracts cash is to settle transactions into and out of a particular group of assets.
• Silvergate puts most of its new money in long-term bonds. Its bond holdings suffered a $1 billion loss in fair value before Silvergate began selling them to meet the withdrawal.
• Following last week’s “undercapitalization” announcement, Silvergate users rushed to withdraw their deposits to move elsewhere.

According to the Washington Post, if Silvergate Capital Corp. went bankrupt, it could become the first bank to go bankrupt because of bad debts rather than bad assets because bad debt is a deposit, not an asset.

Silvergate deposits are not deposits in the conventional sense but more like liquid cash held by money transmitters such as MoneyGram International or Western Union. The only reason Silvergate attracts cash is to settle and resolve specific asset transactions within and outside the group. But deposits at Silvergate can move much slower than this float, and depositors will start disappearing as soon as market interest in the cryptocurrency wanes.

Large banks must retain enough high-quality liquid assets to process withdrawals within 30 days. And Silvergate takes more significant risks, and Silvergate puts most of its new money in long-term bonds.

Before its deposits began to decline rapidly at the end of the third quarter of last year, only 11% of its liquid assets were stored in the U.S. Federal Reserve Deposits in banks and other banks, the rest deposited in securities.

Only 11% of those securities are U.S. Treasuries, with most remaining being mortgage-backed bonds with maturities over ten years. Its bond holdings suffered a $1 billion loss in fair value before Silvergate began selling them to meet the withdrawal.

Silvergate is too small to follow the liquidity rules. Silvergate Capital Corp. is likely to run into these problems anyway. Still, given the incredibly rapid growth rate and common origin of its deposits, its regulators should investigate it carefully first when money quickly disappears.

It follows news on March 2 that Silvergate disclosed that it might be “underfunded” and is “reassessing it is business and strategy.“

Back then, Silvergate Bank was known as a crypto-friendly bank and trader. It holds cash for many exchanges, including the now notorious FTX. It also attracts crypto speculators by promising instant settlement of the dollar aspect of crypto transactions between customers through the Silvergate Exchange Network.

The bank has made several loans against crypto assets. In January, it was reported that the bank was facing a criminal investigation from the Department of Justice over its links to FTX. But the central flaw in its business model was formed long before that.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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