Central Bank's Oversight of Silvergate Criticized by Office of Inspector General

The Federal Reserve Board's Office of Inspector General (OIG) has issued a report criticising the central bank's supervision of Silvergate Bank, a crypto-focused bank that recently announced it would be winding down its operations.

The report, which remains confidential, notes that the Fed did not act quickly enough to address the rising risks at Silvergate as it explored novel crypto-related businesses. The OIG recommends the Board should clarify its approach to supervising bank organisations that change their strategy, and develop guidance for novel business activities, transitions from CBO to RBO, volatile funding sources, and rapidly growing banks.

The report further highlights that the Board and the Federal Reserve Bank of San Francisco viewed Silvergate's activities as traditional banking activities due to cash deposits and loans to crypto industry customers. However, the OIG argues that the limited interpretation allowed Silvergate to transform into a crypto-focused bank without approval or risk mitigation conditions in place.

The report also points out that nepotism among members of Silvergate's senior leadership team undermined the effectiveness of the bank's risk management function. This, coupled with the fact that the bank's deposit accounts were largely funded from companies in one industry, and nearly all deposits were uninsured and noninterest bearing, left the bank susceptible when the crypto industry plunged after crypto exchange FTX filed for bankruptcy in November 2022.

Examiners did not take sufficient measures to pressure Silvergate to improve its risk management capabilities, according to the report. This contradicted Supervision and Regulation Letter 02-9 guidance, which directs assessing the risk implications of a bank's strategic shifts.

The Basel Committee on Banking Supervision made recommendations in a report to ensure that banking organisations engaged in new and unusual business activities have a targeted supervisory framework with corresponding risk assessment. The Fed's response to the OIG's report indicates that they concur with the recommendations and will take action to address each one.

The OIG report concludes with the statement that the Board will follow up to ensure that the recommendations are fully addressed. Silvergate started winding down its operations on March 8, 2023.

The report covers oversight activities from 2013 through 2023, and the specifics of the OIG report remain confidential. The report also highlights that the narrow interpretation by the Board and FRB San Francisco allowed Silvergate to enter new business activities and shift to a crypto-focused bank without approval or risk mitigation conditions.

Central Bank's Oversight of Silvergate Criticized by Office of Inspector General