(Bloomberg) – The woes of Silvergate Capital Corp. escalated on Thursday, a day after the bank raised questions about whether it could stay in business, with shares tumbling to a record low and key partners cutting ties with the crypto-friendly bank.
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The bank raised alarm bells with a filing Wednesday indicating the losses could leave Silvergate with less capital than needed, and it is assessing its ability to continue in business.
Investors and business partners headed for the exits, with shares down 50%, while Coinbase Global Inc., Galaxy Digital Holdings Ltd. and Paxos Trust Co. have decided to stop accepting or initiating payments through Silvergate. The exodus could threaten the bank’s main source of deposits and a platform for crypto participants to transfer money between themselves.
“In light of recent developments and out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate,” Coinbase said on Twitter. “Coinbase will facilitate cash transactions for institutional customers with our other banking partners.”
Galaxy Digital, the crypto financial services company founded by Michael Novogratz, said it still has no material exposure to Silvergate. The company has taken steps “to ensure the safety of customer and company assets as part of our robust risk management process,” its spokesperson said in an email. Paxos issued a similar statement.
Silvergate said Wednesday it could not submit its annual report to the Securities and Exchange Commission on time, prompting at least three analysts to cut their ratings. Canaccord Genuity Group Inc. downgraded the bank to hold, while JPMorgan Chase & Co. downgraded the stock to underweight and Compass Point Research & Trading LLC cut it to neutral. Morgan Stanley analyst Manan Gosalia, who already had a sell-equivalent rating on the stock, removed his price target entirely, citing the “high level of uncertainty” around the company.
JPMorgan said Silvergate faces ongoing liquidity challenges and its Tier 1 leverage ratio for the holding company was 5.36%, just “slightly above the well-capitalized level of 5%”. .
“People are really scared after this news, and it’s hard to say it’s not warranted,” said J. Austin Campbell, assistant professor at Columbia Business School, who runs an independent business consulting firm. of cryptography. “If you look back to 2008, when counterparties started missing regulatory reports or SEC filing deadlines, that was a really bad sign.”
Campbell said he had been contacted by no less than five crypto players, including trading firms, asset management firms and crypto projects, asking for advice on where they should move. bank accounts.
Political debate
“Silvergate is working diligently to file its 10-K as soon as possible and has no further comment at this time,” a spokesperson said Thursday, referring to the late report. Shares were down 46% at midday in New York.
The fragile status of the bank, which holds federally insured deposits and more than $11 billion in assets, will fuel a debate among U.S. lawmakers and regulators over banks’ ability to manage digital asset risk .
“This confirms the fears of many regulators,” said Todd Baker, senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy. “If this bank fails, it will be held up as an example of why banks should be extremely careful in their dealings with crypto companies.”
Even if that doesn’t happen, Silvergate’s setbacks will prompt even greater caution from regulators, he said.
In early January, three of the main financial regulators – the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. – issued a stark warning to banks that crypto-related risks that cannot be controlled should not be allowed to infect the banking system.
Silvergate added to the US political debate when it revealed in January how it was stabilizing its balance sheet after selling billions in assets to pay depositors. At the end of last year, the company held $4.3 billion in short-term advances from the Federal Home Loan Bank, a program originally introduced under President Herbert Hoover to bolster mortgage lending.
On Wednesday, Silvergate listed a Justice Department investigation and increased regulatory scrutiny among factors that could affect financial results.
“The best we can say is not the savings and loans crisis,” said Ian Katz, managing director of Capital Alpha Partners. “It seems to be quite isolated.”
If the fallout within the banking sector is limited, Katz said, regulators will interpret that as justification for the approach they’ve taken.
Still, Silvergate’s current situation will make other banks even more reluctant to work with crypto firms, which will have a chilling effect on this industry, said Henry Elder, head of decentralized finance at digital asset manager Wave. Financial.
“They were the crypto bank,” Elder said. “You definitely won’t see anyone marketing themselves as a crypto bank until there’s more clarity.”
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