Agency's OIG finds fault with central bank's oversight of Silvergate entity
In a damning report, the Federal Reserve Board's Office of Inspector General (OIG) has criticized the central bank's supervision of Silvergate Bank in the years leading up to its failure. The evaluation, initiated in March 2023 following the bank's announcement to voluntarily liquidate, covered oversight activities from 2013 through 2023.
The report highlights several areas where the Fed could have done better in its supervision of Silvergate. One key finding was the limited interpretation that allowed Silvergate to transform into a crypto-focused bank without approval or risk mitigation conditions in place. This contradicted Supervision and Regulation Letter 02-9 guidance, which directs assessing the risk implications of a bank's strategic shifts.
The OIG report also found that examiners did not take sufficient measures to pressure Silvergate to improve its risk management capabilities and key control functions. The report notes that this oversight left the bank susceptible when the crypto industry plunged after crypto exchange FTX filed for bankruptcy in November 2022, leading to crashing crypto prices and a liquidity crisis for Silvergate.
The report further recommends the Federal Reserve Board to expand examiners' guidance related to volatile funding sources, clarify its approach to supervising bank organizations that change their strategy, and develop guidance to ensure that banking organizations engaged in new and novel business activities have a custom-tailored supervisory plan and approach.
The OIG also recommends the Board to better prepare institutions and examiners for transitions from the Community Banking Organization portfolio to the Regional Banking Organization one. Additionally, the report suggests guidance to address rapidly growing banks to avoid failures.
The Financial Stability Oversight Council (FSOC) also criticized the response pattern to changes in banks' business strategies and the adjustment of supervisory practices, including Silvergate Bank, and made recommendations for improvement.
The specifics of the report remain confidential, but the OIG concludes that the Board should follow up to ensure that the recommendations are fully addressed. The Federal Reserve Board's Board concurs with the OIG's recommendations and outlines actions to address each recommendation.
Notably, the report does not mention any purchase licensing rights. In March 2023, Silvergate started winding down its operations. The evaluation of Silvergate's supervision by the OIG was initiated to identify potential supervisory lessons learned following the bank's announcement to voluntarily liquidate.
The report underscores the importance of robust supervision, particularly in the rapidly evolving crypto industry. The Federal Reserve Board is now under pressure to implement the OIG's recommendations to prevent similar failures in the future.
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