Silvergate Bank's Crypto Entanglement: Critical Oversight in Federal Examination

The collapse of Silvergate Bank underwent thorough scrutiny by the Federal Reserve's inspector general. It was determined that Federal Reserve examiners fell short in promptly identifying the issues, with part of the responsibility placed on ineffective management.

Silvergate Bank's evolution from a local lender to a prominent crypto-centric institution occurred without triggering concerns from Federal Reserve examiners. This revelation stems from a report released by the Federal Reserve’s Office of Inspector General (OIG). This lack of oversight allowed the bank to take risks that ultimately proved detrimental.

Despite its initial obscurity, Silvergate emerged as a pivotal player in the digital assets sector, despite being viewed skeptically by larger, more conventional institutions. Operating primarily as a lender focused on a single industry for nearly a decade, the OIG's investigation concluded that this strategic shift should have prompted a different form of registration, a demand overlooked by government supervisors. Additionally, there were various concerns that Federal Reserve examiners were sluggish in addressing as the bank approached its voluntary winding-down in March, following the crypto market turbulence of the preceding year.

"The report highlighted that examiners should have taken more assertive and decisive supervisory measures, given the bank's unchecked growth; its unstable funding and deposit concentrations; and its significant, widespread, and persistent vulnerabilities in crucial control functions," the report emphasized.

The OIG pointed out that according to banking regulations, Silvergate should have submitted an application to the Federal Reserve when it shifted its focus entirely to crypto. However, the bank's examiners in California concluded that because it continued to accept deposits and extend loans to customers, it still operated as a standard commercial bank. Consequently, the examiners did not press for the implementation of new risk management measures to align with the bank's revamped strategy.

The issues at Silvergate extended to what the OIG termed as "ineffective" senior management, allegedly marred by nepotism. Although the report did not delve into the specifics of the nepotism claims, former CEO Alan Lane faced substantial criticism for appointing multiple family members to senior positions.

"The report concluded that 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," the OIG stated.

Given that Silvergate chose voluntary liquidation, it technically did not experience a failure, obviating the need for government intervention to reimburse depositors.

In light of these findings, the OIG proposed various internal recommendations for how Federal Reserve examiners should handle similar situations in the future. The Federal Reserve Board of Governors has concurred with the need to develop new and expanded guidelines regarding rapidly growing banks that alter their focus.

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