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Good context by Matt Levine a few days ago [1]. Basically Silvergate did a lot of business with crypto firms and got burned not by crypto speculation but just b

by dzdt 4y ago

Good context by Matt Levine a few days ago [1]. Basically Silvergate did a lot of business with crypto firms and got burned not by crypto speculation but just by holding long maturity safe assets when too many of their customers wanted to withdraw money on a short term basis. The result was falling below the line of being "well capitalised" as a bank. Bank regulation seems to be working here: there is no indication of wrongdoing or losses to depositors... [1] https://www.bloomberg.com/opinion/articles/2023-03-02/silvergate-had-a-crypto-bank-run https://www.bloomberg.com/opinion/articles/2023-03-02/silver...

rkagerer 4y ago
[1] https://archive.is/yH1A5 https://archive.is/yH1A5
- rkagerer 4y ago
  Silvergate’s assets are real boring normal stuff Their safe, boring assets weren't safe and boring enough. Why can't there be a bank like this that just keeps your cash as cash?
  - Temporary_31337 4y ago
    Because customers expect low or no fees for just holding cash.
  - ivalm 4y ago
    Presumably because then they would have to charge you a percentage of your money for storage and people don’t want to pay the bank.
    - eyelidlessness 4y ago
      And for pretty good reason, at least it seems to me. Doing business with physical currency is not just objectively worse than digital transactions under most circumstances, it’s also increasingly untenable for more and more of life. Banking services basically are so successful they became a necessity for the vast majority of people who can access them—you have to have money storage, as a prerequisite to moving money you can’t or don’t wish to store. I can’t think of a reason I should pay a bank for the privilege of access to paying some of my own money to another party. On the other hand, I think this is just as good an argument that the kind of banking I’m describing should be a public good rather than a part of the services provided by investment firms. I even think there’s fairly good precedent for that argument, albeit at a drastically larger scale and with an unfortunately storied history of fraud and abuse.
      - ivalm 4y ago
        As a public good you want all money to be invested. Money that is under lock and key is dead money. So having the bank lend your money IS a societal good. That it generates cash flow is just a bonus.
  - adam_arthur 4y ago
    Not sure why people are upset with this comment. Many banks do put customer funds into T-Bills, or park it with the Fed at the fed funds rate. Both of which are 0 risk and effectively instantly redeemable. And this is still highly profitable right now, if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Pretty much every crypto adjacent firm has decided to take excessive risk with customer deposits to skim some off the top instead
    - Blackthorn 4y ago
      > if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Absolutely insane how my local bank's money market account interest rate is something like 1.4%. Their CDs only hit 3%. Like come the fuck on. Ended up moving most of my money out of there.
    - panarky 4y ago
      Some are probably upset with it because they want Silvergate's liqudiation to be caused by crypto, and not super-safe US Treasurys. Turns out Silvergate's bitcoin loans are just fine, and it was the Treasurys that fucked them up. Others are probably upset with it because Silvergate had the option to hold cash as cash, or cash as one-month T-bills, and if they had done that, they wouldn't have had to liquidate. But instead they locked it up in much longer dated bonds to grab a little extra yield, and got burned when interest rates increased.
      - nly 4y ago
        Its presumably not that market rates increased that fucked them up, it's that they couldn't hold to maturity due to short term redemptions?
        adam_arthur 4y ago
        Yes, despite these being "safe" they effectively took on duration risk, and their bonds were "callable" by their customers. Not safe at all despite credit-risk being low
  - johntb86 4y ago
    It would be impractical to keep the cash in the form of 100 dollar bills. Given that, they need to be database entries in the Fed's system, and the Fed has discouraged banks from trying to keep large balances long-term: https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
    - rkagerer 4y ago
      Interesting. That article from 2018 speculates on the Fed's motivation, but seems upfront that nobody is certain why they gave TNB such a hard time. Has the story developed since then? Did the suit go to trial? EDIT: In 2020 the Southern District of New York court dismissed TNB's complaint[1], finding the 18 month wait did not construe a denial (despite the application form saying a decision "may take 5-7 days"). I guess there was no appeal? [1] https://justmoney.org/the-narrow-bank/ https://justmoney.org/the-narrow-bank/
  - JumpCrisscross 4y ago
    > safe, boring assets weren't safe and boring enough No, they weren't. Duration is a measured risk [1]. Silvergate chose a flighty, risky set of clients. Their portfolio should have been optimized for liquidity, not yield. They got greedy and are paying the price. [1] https://en.wikipedia.org/wiki/Bond_duration https://en.wikipedia.org/wiki/Bond_duration
londons_explore 4y ago
> holding long maturity safe assets I thought banks were able to sell those long maturity assets for cash to another bank or investor to avoid exactly that kind of situation? And my understanding is banks must meet their regulatory requirements overnight each night, so there is a market for overnight loans/swaps/etc to make sure thats the case.
- dragontamer 4y ago
  > I thought banks were able to sell those long maturity assets for cash to another bank or investor to avoid exactly that kind of situation? Those assets dropped in value by like 20% last year. Check out the stock ticker "TLT", which tracks 20+ year treasuries to see just how bad it was, zoom out to 1-year or 2-years.
  - Octokiddie 4y ago
    That TLT story is being severely under-reported.
    - mnadkvlb 4y ago
      TLTs value went down because yields went up. This is by design, anyone who invested in TLT at zero rates should have known the yields to price function. Honestly i dont see whats to hide here in reporting ?? Can you explain what am i missing here ?
      - toomuchtodo 4y ago
        You’re not missing anything. If you invested in mid to long duration bonds right before the Fed started rocketing rates, you had a bad time.
        mnadkvlb 4y ago
        again, why would i put my money in bonds when the interest rates are rock bottom ? I invest in treasuries when interests are high or gonna stay high. If i see us hitting a recession in coming year, i keep mostly cash and start piling into treasuries over each hike cycle until at least the central banks start cutting rates and keep riding the treasuries till rates keep moving down. Or in other words, dont fight the fed
yieldcrv 4y ago
Matt Levine is a good example of how writing cynically about crypto matters makes you wind up correcting crypto adversaries so much that you wind up coming across as a crypto proponent, simply from being able to opine accurately on what's going on.
mananaysiempre 4y ago
I’m not sure what I think about this. It’s literally the first time I hear about Silvergate, I don’t have strong feelings about its continued existence or lack thereof, and my vision of the ideal situation in cryptocurrency is rooted in, like, 2010, but I’m reading this and... > It’s just last week that US regulators warned banks about this [...]. It’s almost like they knew this was coming. The regulators did not quite say “therefore, don’t bank crypto exchanges”; in fact, they said the opposite [...]. But you got the idea. If you stay silent most of the time, but say “we might be on a collision course with an iceberg” an hour before said iceberg comes along, your advice is very valuable (it might not be legibly valuable if it’s the first time you spoke up, but that’s not the concern here). If you say a lot of things all the time and then warn about the iceberg thing a minute before it happens, well, your advice is still better than nothing, but it’s not exactly an example of amazing foresight. And surely appending “captains have broad discretion over the course of their ship, as permitted by law or regulation” to the warning should discount its value further, at least a bit. > A run on the bank happens in, like, It’s a Wonderful Life, but in the real world of big US banks, that particular dynamic [...] would be strange. [...] The story today is that Silvergate’s customers are withdrawing their money because they are worried about Silvergate [...]. But that's not why they were withdrawing their money in late 2022, when the trouble started. Then, they were withdrawing their money because crypto had collapsed [...]. The customers — crypto exchanges — were the problem, not Silvergate. [...]. I suppose this counts as contagion from the crypto crash to the real financial system [...] It is a narrow sort of contagion: That bank is pretty much the Bank of Crypto [...]. But it is certainly the sort of contagion that regulators will want to discourage [...]. Are the crypto exchanges the problem, though? This doesn’t read like a “cryptocurrency bad” story, it reads like a “being the Bank of Thing is bad” story. Cryptocurrency exchanges are a particularly bad value of Thing here, sure, but generally speaking, if you are the Bank of Thing and an overwhelming majority of your depositors are in the Thing business, then aren’t you essentially betting that Thing will not experience short-term volatility? Most of the time, the most relevant Thing is retail deposits, and as the article mentions, there’s a whole bunch of stuff instituted to smooth that out, but doesn’t this still apply for other, deposit-insurance-disadvantaged Things just as well? In that view, it seems like, first, there should be indeed some opinions that, if you a running a bank, being an undiversified Bank of Thing on the depositor side is not a good idea, but also, second, that if you are a bank regulator and you regulate a Thing to a point where most but not all banks will refuse Thing businesses, you are very much accepting that those few remaining banks will be vulnerable.
resource0x 4y ago
Then why is it being investigated? https://www.bloomberg.com/news/articles/2023-02-02/silvergate-faces-doj-fraud-probe-over-ftx-and-alameda-dealings?leadSource=uverify%20wall https://www.bloomberg.com/news/articles/2023-02-02/silvergat...

by dzdt 4y ago

rkagerer 4y ago

[1] https://archive.is/yH1A5 https://archive.is/yH1A5

rkagerer 4y ago
Silvergate’s assets are real boring normal stuff Their safe, boring assets weren't safe and boring enough. Why can't there be a bank like this that just keeps your cash as cash?
- Temporary_31337 4y ago
  Because customers expect low or no fees for just holding cash.
- ivalm 4y ago
  Presumably because then they would have to charge you a percentage of your money for storage and people don’t want to pay the bank.
  - eyelidlessness 4y ago
    And for pretty good reason, at least it seems to me. Doing business with physical currency is not just objectively worse than digital transactions under most circumstances, it’s also increasingly untenable for more and more of life. Banking services basically are so successful they became a necessity for the vast majority of people who can access them—you have to have money storage, as a prerequisite to moving money you can’t or don’t wish to store. I can’t think of a reason I should pay a bank for the privilege of access to paying some of my own money to another party. On the other hand, I think this is just as good an argument that the kind of banking I’m describing should be a public good rather than a part of the services provided by investment firms. I even think there’s fairly good precedent for that argument, albeit at a drastically larger scale and with an unfortunately storied history of fraud and abuse.
    - ivalm 4y ago
      As a public good you want all money to be invested. Money that is under lock and key is dead money. So having the bank lend your money IS a societal good. That it generates cash flow is just a bonus.
- adam_arthur 4y ago
  Not sure why people are upset with this comment. Many banks do put customer funds into T-Bills, or park it with the Fed at the fed funds rate. Both of which are 0 risk and effectively instantly redeemable. And this is still highly profitable right now, if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Pretty much every crypto adjacent firm has decided to take excessive risk with customer deposits to skim some off the top instead
  - Blackthorn 4y ago
    > if you offer customers yields below fed funds rate (~5%), the money on the spread is risk free. Absolutely insane how my local bank's money market account interest rate is something like 1.4%. Their CDs only hit 3%. Like come the fuck on. Ended up moving most of my money out of there.
  - panarky 4y ago
    Some are probably upset with it because they want Silvergate's liqudiation to be caused by crypto, and not super-safe US Treasurys. Turns out Silvergate's bitcoin loans are just fine, and it was the Treasurys that fucked them up. Others are probably upset with it because Silvergate had the option to hold cash as cash, or cash as one-month T-bills, and if they had done that, they wouldn't have had to liquidate. But instead they locked it up in much longer dated bonds to grab a little extra yield, and got burned when interest rates increased.
    - nly 4y ago
      Its presumably not that market rates increased that fucked them up, it's that they couldn't hold to maturity due to short term redemptions?
      - adam_arthur 4y ago
        Yes, despite these being "safe" they effectively took on duration risk, and their bonds were "callable" by their customers. Not safe at all despite credit-risk being low
- johntb86 4y ago
  It would be impractical to keep the cash in the form of 100 dollar bills. Given that, they need to be database entries in the Fed's system, and the Fed has discouraged banks from trying to keep large balances long-term: https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
  - rkagerer 4y ago
    Interesting. That article from 2018 speculates on the Fed's motivation, but seems upfront that nobody is certain why they gave TNB such a hard time. Has the story developed since then? Did the suit go to trial? EDIT: In 2020 the Southern District of New York court dismissed TNB's complaint[1], finding the 18 month wait did not construe a denial (despite the application form saying a decision "may take 5-7 days"). I guess there was no appeal? [1] https://justmoney.org/the-narrow-bank/ https://justmoney.org/the-narrow-bank/
- JumpCrisscross 4y ago
  > safe, boring assets weren't safe and boring enough No, they weren't. Duration is a measured risk [1]. Silvergate chose a flighty, risky set of clients. Their portfolio should have been optimized for liquidity, not yield. They got greedy and are paying the price. [1] https://en.wikipedia.org/wiki/Bond_duration https://en.wikipedia.org/wiki/Bond_duration

londons_explore 4y ago

> holding long maturity safe assets I thought banks were able to sell those long maturity assets for cash to another bank or investor to avoid exactly that kind of situation? And my understanding is banks must meet their regulatory requirements overnight each night, so there is a market for overnight loans/swaps/etc to make sure thats the case.

dragontamer 4y ago
> I thought banks were able to sell those long maturity assets for cash to another bank or investor to avoid exactly that kind of situation? Those assets dropped in value by like 20% last year. Check out the stock ticker "TLT", which tracks 20+ year treasuries to see just how bad it was, zoom out to 1-year or 2-years.
- Octokiddie 4y ago
  That TLT story is being severely under-reported.
  - mnadkvlb 4y ago
    TLTs value went down because yields went up. This is by design, anyone who invested in TLT at zero rates should have known the yields to price function. Honestly i dont see whats to hide here in reporting ?? Can you explain what am i missing here ?
    - toomuchtodo 4y ago
      You’re not missing anything. If you invested in mid to long duration bonds right before the Fed started rocketing rates, you had a bad time.
      - mnadkvlb 4y ago
        again, why would i put my money in bonds when the interest rates are rock bottom ? I invest in treasuries when interests are high or gonna stay high. If i see us hitting a recession in coming year, i keep mostly cash and start piling into treasuries over each hike cycle until at least the central banks start cutting rates and keep riding the treasuries till rates keep moving down. Or in other words, dont fight the fed

yieldcrv 4y ago

Matt Levine is a good example of how writing cynically about crypto matters makes you wind up correcting crypto adversaries so much that you wind up coming across as a crypto proponent, simply from being able to opine accurately on what's going on.

mananaysiempre 4y ago

I’m not sure what I think about this. It’s literally the first time I hear about Silvergate, I don’t have strong feelings about its continued existence or lack thereof, and my vision of the ideal situation in cryptocurrency is rooted in, like, 2010, but I’m reading this and... > It’s just last week that US regulators warned banks about this [...]. It’s almost like they knew this was coming. The regulators did not quite say “therefore, don’t bank crypto exchanges”; in fact, they said the opposite [...]. But you got the idea. If you stay silent most of the time, but say “we might be on a collision course with an iceberg” an hour before said iceberg comes along, your advice is very valuable (it might not be legibly valuable if it’s the first time you spoke up, but that’s not the concern here). If you say a lot of things all the time and then warn about the iceberg thing a minute before it happens, well, your advice is still better than nothing, but it’s not exactly an example of amazing foresight. And surely appending “captains have broad discretion over the course of their ship, as permitted by law or regulation” to the warning should discount its value further, at least a bit. > A run on the bank happens in, like, It’s a Wonderful Life, but in the real world of big US banks, that particular dynamic [...] would be strange. [...] The story today is that Silvergate’s customers are withdrawing their money because they are worried about Silvergate [...]. But that's not why they were withdrawing their money in late 2022, when the trouble started. Then, they were withdrawing their money because crypto had collapsed [...]. The customers — crypto exchanges — were the problem, not Silvergate. [...]. I suppose this counts as contagion from the crypto crash to the real financial system [...] It is a narrow sort of contagion: That bank is pretty much the Bank of Crypto [...]. But it is certainly the sort of contagion that regulators will want to discourage [...]. Are the crypto exchanges the problem, though? This doesn’t read like a “cryptocurrency bad” story, it reads like a “being the Bank of Thing is bad” story. Cryptocurrency exchanges are a particularly bad value of Thing here, sure, but generally speaking, if you are the Bank of Thing and an overwhelming majority of your depositors are in the Thing business, then aren’t you essentially betting that Thing will not experience short-term volatility? Most of the time, the most relevant Thing is retail deposits, and as the article mentions, there’s a whole bunch of stuff instituted to smooth that out, but doesn’t this still apply for other, deposit-insurance-disadvantaged Things just as well? In that view, it seems like, first, there should be indeed some opinions that, if you a running a bank, being an undiversified Bank of Thing on the depositor side is not a good idea, but also, second, that if you are a bank regulator and you regulate a Thing to a point where most but not all banks will refuse Thing businesses, you are very much accepting that those few remaining banks will be vulnerable.

resource0x 4y ago

Then why is it being investigated? https://www.bloomberg.com/news/articles/2023-02-02/silvergate-faces-doj-fraud-probe-over-ftx-and-alameda-dealings?leadSource=uverify%20wall https://www.bloomberg.com/news/articles/2023-02-02/silvergat...