Bloomberg: The Federal Reserve’s interest rate increase accelerated the collapse of Silvergate

It is reported that Bloomberg analyzed the reasons for the closure of Silvergate, a cryptobank, in its latest report, including lack of diversification, term mismatch and high exposure to cryptocurrencies. Due to the uniqueness of Silvergate’s balance sheet, Silvergate does not pay interest for its cryptocurrency customers’ deposits, so it is equivalent to having a “free fund pool” to invest in government debt and similar current assets. However, the Federal Reserve’s constant interest rate increase led to the collapse of Silvergate’s securities portfolio, and the bank customer run led to Silvergate having to sell these securities at a low price, thus accelerating the collapse.

Interpretation of this information:

The closure of Silvergate, a cryptobank, has been analyzed by Bloomberg in their latest report. The analysis highlights three main reasons for the closure of the cryptobank which includes lack of diversification, term mismatch and high exposure to cryptocurrencies.

Due to the unique structure of Silvergate’s balance sheet, the banks does not pay interest for its cryptocurrency customers’ deposits, which provides the bank with a “free fund pool” to invest in government debt and similar current assets. However, this strategy proved to be a significant challenge when the Federal Reserve began increasing interest rates, which led to the collapse of Silvergate’s securities portfolio. The bank’s customer run worsened the situation, forcing Silvergate to sell these securities at a low price, thus accelerating the collapse.

The lack of diversification of Silvergate’s investments left the bank vulnerable to changes in interest rates, which led to the second reason for the bank’s closure – it’s term mismatch. This essentially means that the bank’s investments had a longer-term duration than its liabilities. Hence, when the Federal Reserve began raising interest rates, the bank’s liabilities started to demand a higher interest rate than its assets can provide, leading to a negative interest margin for the bank.

The third reason for the bank’s closure is its high exposure to cryptocurrencies. As a cryptocurrency-focused bank, Silvergate’s business model was inherently risky due to the volatile cryptocurrency market. The bank’s inability to mitigate this risk eventually led to its downfall.

In summary, Silvergate’s closure was due to a combination of factors, including lack of diversification, term mismatch, and high exposure to cryptocurrencies. These factors made the bank vulnerable to changes in the market, leaving it unable to respond and ultimately leading to its collapse.