Silvergate Bank has agreed with a Federal Reserve order to file a self-liquidation plan with California financial regulators within 10 days.
The Federal Reserve's Board of Governors announced the order on Wednesday as part of the process to wind down the crypto-friendly California bank’s operations. The bank must conserve cash and other resources in order to make depositors whole.
The California Department of Financial Protection and Innovation has to approve the plan to liquidate the bank’s assets, though a deadline extension for the plan can be granted. Silvergate announced in March that it would end operations after the bank's business failed.
The Fed order notes that the most recent examination of Silvergate Bank by state regulators and officials with the Federal Reserve Bank of San Francisco “identified numerous deficiencies, including with respect to both safety and soundness and compliance with banking laws and regulations.” It connected the bank’s failure to its dealings with the now defunct crypto exchange FTX.
The bank temporarily survived FTX's collapse, as well as a write down on hundreds of millions of dollars-worth of Facebook-linked digital asset Diem, by taking out an unusual and controversial multi-billion dollar emergency loan from the Federal Home Loan Bank of San Francisco, a government-created entity meant to backstop mortgage borrowing in the U.S.
“The Bank experienced significant declines in deposits by its crypto-asset-related customers, triggered in part by the collapse of the crypto-asset exchange FTX Trading Ltd. and its affiliated proprietary trading firm Alameda Research LLC (collectively, ‘FTX/Alameda’),” the Fed said. The FTX and Alameda failure, combined with Silvergate’s business strategy tied to the digital asset industry, and a bank run that was prelude to similar higher-impact runs at Silicon Valley and Signature Banks “resulted in funding and liquidity stress on the Bank and a decline in activities that were key sources of revenue.”
The announcement from the Fed notes that Silvergate’s leadership voluntarily agreed to all parts of the enforcement action. As part of the order, any bonuses, promotions or severance payments for senior executives have to be approved by regulators.
The Fed has authority to take action with regards to state-chartered banks like the La Jolla, Calif.-based Silvergate if they are part of the central bank's system in which it acts as the lender of last resort.
Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.
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