Regulators could have been more hands-on with a decision by Silvergate Bank in La Jolla, Calif., to work with the cryptocurrency industry. That was a key takeaway from a report issued by the Federal Reserve’s Office of the Inspector General. The report was limited in its disclosures because the bank, while in liquidation, remains in operation. Still, the OIG noted that Fed didn’t require the bank to seek its approval, or set conditions, for the crypto push. “Examiners could have taken more aggressive, decisive action to address their concerns,” the report added. The report, which includes recommendations for supervising banks that are looking to pursue “new and novel” business lines, noted that the Fed could have strengthened its process for moving Silvergate from one set of supervisors to another as it grew. The report also looked at the shortcomings at Silvergate, which announced plans to voluntarily liquidate on March 8. That announcement set in motion events that led to the failure of Silicon Valley Bank and First Republic Bank. The bank's demise “stemmed from its concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks due to nearly all of the bank's deposits being uninsured and noninterest bearing,” the report said. “It also had significant weaknesses in its corporate governance and risk management capabilities.” The report also said that "nepotism, evidenced in the several familial relationships among members of the bank's senior leadership team, undermined the effectiveness of the bank's risk management function." The report, which comes on the heels of a similar report tied to Silicon Valley Bank’s failure, had 12 recommendations, including:
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Provide examiners with more resources to determine when a bank needs to file an application and receive approval for a change in its business plan.
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Create guidance so that banks engaged in new and novel business activities have “a custom-tailored supervisory plan and approach appropriate for their uniqueness and associated risks.”
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Develop and implement a plan for instructing examiners for banks with less than $100 billion of assets to take a forward-looking view of a bank’s risk profile and the profile’s possible and plausible outcomes.
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Create guidance for examiners to prepare banks crossing over $10 billion of assets. Examiners should be instructed on board responsibilities and “procedures for developing and updating the supervisory plan,” among other things.
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Expand the scope of examiner guidance tied to volatile funding sources and liquidity risks, highlighting risks associated with concentrations in uninsured and noninterest-bearing deposits.
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Develop guidance for examiners on supervising banks projecting or experiencing rapid growth, including identifying factors that could “hinder a bank’s ability to operate in a safe and sound manner.”