Alan Lane’s dreams have collapsed but not the bank
2023.01.05 13:51
Alan Lane’s dreams have collapsed but not the bank
Budrigannews.com – While Alan Lane’s goals may have vanished, his bank has not. After digital-asset customers withdrew nearly 70% of their balances, deposit-taker Silvergate Capital (SI.N) said on Thursday that it had been forced to quickly raise funds and flog assets. Lane and his investors suffer greatly as a result. There is much to reassure the banking system in the United States and the households that rely on it.
Silvergate was the epitome of a typical, but increasingly uncommon, bank run. From $11.9 billion in September, crypto company deposits decreased to $3.8 billion in December. The failure of one of Lane’s customers, the bankrupt exchange FTX, partially sparked the panic. Not helping matters is the fact that the government only covers deposits up to $250,000, when institutions are likely to have much more in their accounts. Silvergate had to sell the securities it held and use wholesale funding markets to meet the demand for cash.
Even though it was bad, it could have been much worse. Instead of locking up customer deposits in loans, Silvergate had piled $15 billion worth of government bonds and other easy-to-sell assets on its balance sheet. It has approved lending commitments to customers totaling approximately $1.1 billion that are exclusively secured against bitcoin, but none of those loans have resulted in losses. Silvergate treated deposits as lubricant for the Silvergate Exchange Network, its payment product, rather than lending fuel. As a result, it actively discouraged customers from parking more money than they needed.
Additionally, Silvergate stands out in other ways. In September, its equity capital was approximately four times higher than that of the majority of big banks, representing approximately 40% of its risk-weighted assets. Lane’s conservatism could be partly to blame for that. However, bank regulators have also restricted crypto: They issued a warning on Tuesday, stating that they are closely monitoring banks’ crypto-focused business models. Crypto cannot be held directly by banks. Silvergate is under the thumb of a number of agencies, including the Federal Reserve and the California financial regulator.
Despite this, Lane’s bank is now just a speck. It has laid off around 40% of its employees and put off launching a blockchain-based payment product. In less than six months, the shares have gone down 90%. It’s definitely embarrassing. But for the time being, that is all. The fact that a popular crypto bank is able to lose the majority of its deposits without going bankrupt or causing chaos for other institutions indicates that the barrier that separates digital and conventional finance is still in place.
Silvergate Capital reported on January 5 that cryptocurrency customers’ deposits had decreased by 68% to $3.8 billion as of December 31, forcing the bank to sell investment securities, raise additional funding, and reduce its workforce by 40%.
Silvergate provides digital asset companies with banking services, including a payment network for institutions known as the Silvergate Exchange Network, which had daily volumes of $1.3 billion in the fourth quarter. Silvergate’s customers include the bankrupt cryptocurrency exchange FTX.
According to Chief Executive Alan Lane, the bank has raised funds from the market and the government-sponsored Federal Home Loan Banks, and it now has $4.6 billion in cash and cash equivalents, exceeding its balance of customer deposits. He blamed a “crisis of confidence” in the cryptocurrency industry for the withdrawal of deposits.
Silvergate incurs a loss of $718 million as a result of the securities sales. In addition, it will incur an impairment charge of $196 million to reflect the decreased value of technology it had acquired in preparation for the launch of a blockchain-based payment product. According to Refinitiv, analysts had anticipated that Silvergate would earn $124 million in 2023 prior to the announcement.
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