Federal Reserve Blames Crypto As It Reveals Reasons Behind Silvergate Bank Failure

The Office of Inspector General of the Federal Reserve System has released a report revealing the reasons behind the failure of Silvergate Bank, including over-reliance on high-risk crypto deposits and nepotism.

The full report has not been released to observe "confidential supervisory and trade secret information" since Silvergate Bank is still an open institution, but its executive summary dated Sept. 27 has been made available to the public, detailing underlying problems that reportedly began in 2013 and led to the bank's downfall.

The problem, according to the Feds, started when the senior leadership of the bank shifted its strategy and focused on "customers engaged in crypto activities," underlining that the institution took too big of a risk in one industry.

"Beginning in 2013, Silvergate senior management changed the bank's strategy to focus on customers engaged in crypto activities," the executive summary said.

Another issue mentioned in the report is the ineffectiveness of the bank's board of directors and senior management, as well as its risk management and corporate governance capabilities.

"Silvergate's board of directors and senior management were ineffective, and the bank's corporate governance and risk management capabilities did not keep pace with the bank's rapid growth, increasing complexity, and evolving risk profile," it said.

The executive summary also pointed out the kind of deposits the bank was handling, which "were largely funded from companies in one industry." It also noted that "nearly all deposits were uninsured and noninterest-bearing."

Nepotism is also mentioned as one of the reasons behind the bank's failure.

"Further, nepotism, evidenced in the several familial relationships among members of the bank's senior leadership team, undermined the effectiveness of the bank's risk management function," the executive summary said.

Silvergate Bank reportedly failed to follow existing banking regulations because if it did, it could have filed a new application with the Fed.

However, the government supervisors failed to put pressure on the bank so it could put new risk protection measures in place.

"Lastly, we found that the Board does not have guidance for examiners supervising banks projecting or experiencing significant, rapid growth and does not have guidance on how examiners should assess whether a bank's risk management capabilities and key control functions have evolved with that growth. Examiners did not take sufficient measures to pressure Silvergate to improve its risk management capabilities and key control functions so that it could effectively manage the bank's escalating risk profile," the executive summary disclosed.

In March, Silvergate Capital, the parent company of the crypto-friendly bank Silvergate, announced that it was winding down its operations and would voluntarily liquidate the bank after getting hit by the sweeping impact of the turmoil in digital assets.

"In light of recent industry and regulatory developments, Silvergate believes that an orderly wind-down of Bank operations and a voluntary liquidation of the Bank is the best path forward," the parent company said in a press release at the time.