Crypto Market Volatility Did Not Cause Failures of Silvergate and Silicon Valley Banks, Congressional Research Shows
Recently, there has been a lot of discussion about the role of cryptocurrency in the failures of Silvergate, Silicon Valley, and Signature Banks. However, according to a report by the Congressional Research Service (CRS), these banks did not fail because of crypto.
BANKING & REGULATION
Recently, there has been a lot of discussion about the role of cryptocurrency in the failures of Silvergate, Silicon Valley, and Signature Banks. However, according to a report by the Congressional Research Service (CRS), these banks did not fail because of crypto. While these banks did provide banking services to cryptocurrency firms, the report suggests that their exposure to crypto did not exacerbate other bank risks.
Each bank had varying levels of involvement with cryptocurrency firms. Silvergate had the highest concentration of crypto industry deposits, with more than 90% of total deposits coming from crypto clients. Signature had digital assets reserves accounting for 20% of deposits, while Silicon Valley Bank (SVB) claimed to have minimal exposure through deposits from, and loans to, crypto firms. However, it was revealed that Circle, the issuer of the USD Coin (USDC) stablecoin, held $3.3 billion of stablecoin reserves at SVB, causing USDC to depeg from the US dollar and drop to less than $0.88 before regaining the peg when it became clear that all SVB deposits would be guaranteed.
Loan exposure to the crypto industry is less clear, with SVB claiming minimal loan exposure to crypto firms. Silvergate, on the other hand, offered Bitcoin-collateralized loans to industry participants. At the end of September 2022, the bank held $302 million in Bitcoin-collateralized loans (of a $1.5 billion commitment) against which borrowers had posted $769.9 million in Bitcoin as collateral. Signature also previously offered digital asset collateralized loans, but it stated in its last annual report that it does not make crypto-backed loans, lend to the crypto industry, or hold crypto assets. However, a press release from a bank that bought some of Signature’s assets implied Signature may have had some.
The report suggests that while some banks worked with high-profile crypto company failures, exposure was limited. FTX and Celsius were mentioned as examples, but their deposits represented less than 10% of Silvergate's and little more than 0.1% of Signature's total deposits, respectively. In a House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology and Inclusion hearing, New York State Department of Financial Services Superintendent Adrienne Harris explained that attributing Signature’s failure to crypto was a “misnomer” and that crypto withdrawals during the bank run were proportional to the bank’s total crypto deposits.
The report also notes that the depletion of deposits was likely due to the crypto market downturn, rather than direct exposures to specific crypto firms. After reaching an all-time high of around $3 trillion in November 2021, crypto lost more than two-thirds of its market capitalization by December 2022. As digital asset prices fell, centralized crypto platforms and stablecoin issuers experienced redemptions, likely causing them to draw down deposits held at these banks. To meet withdrawal demand, banks sold ostensibly safe securities for losses, affecting their liquidity and—in some cases—their solvency. In the fourth quarter of 2022, Silvergate’s deposits fell by more than half, hastening a drop that began earlier in the year. Signature’s deposits fell by around 15% over the same period.
The CRS report suggests that while the involvement of these recently failed banks with the cryptocurrency industry seemed to be the manifestation of crypto market volatility affecting traditional finance, it did not cause the banks to fail. While these banks did have exposure to the crypto industry, their involvement was limited and did not exacerbate other bank risks.