Crypto Panic at Silvergate Spawns a New Breed of Bank Run

(Bloomberg) — When US banks fell like dominoes during the Great Depression, the cause was often a classic run: Depositors withdrew cash en masse amid fears that lenders were amassing huge losses on bad loans and investments.

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The cryptocurrency era just put a new twist on that — with the depositors running into trouble first.

Silvergate Capital Corp., a California lender that offers digital-asset ventures a place to park their cash, jolted shareholders Thursday with the revelation that it had recently survived an $8.1 billion drawdown on deposits. That’s roughly 70%, even more severe than runs seen in the Depression. But in this case, the bad betting was done by the depositors themselves, a roster of crypto entities including parts of Sam Bankman-Fried’s doomed FTX empire.

“This is unprecedented, it’s very unusual,” said Karen Petrou, a managing partner at Federal Financial Analytics, a Washington-based research firm. “Because they were so dependent on crypto funding, they were vulnerable for a run. Given the crypto market has been unstable, they got it.”

Bank regulators, she said, will take a closer look at such situations.

Indeed, earlier this week the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued an unusual joint warning to banks that deal with crypto firms, expressing concerns about business models that are too concentrated in crypto-related activities.

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the regulators said.

Silvergate expressed confidence in its liquidity and ability to move on, a notion supported by several Wall Street analysts. But Silvergate’s disclosure — which included selling assets at a loss to raise cash — sent its stock tumbling, bringing its total slide to more than 90% since the end of 2021, the year Bitcoin reached a record high.

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The shares slid again on Friday, dropping as much as 14%, as analysts warned that the deposit…

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