solvent

Is Silvergate solvent?  Media coverage suggests it can stay in business based on the crypto bank’s liquidity.  Liquidity is, though, only a necessary condition for a bank to survive.  For it actually to remain in business, a bank must also be solvent.  For Silvergate and several other crypto-heavy banks this won’t be easy.

The critical criterion determining whether regulators allow a bank to remain in business is the extent to which its capital meets or exceeds the rules and, when it doesn’t, how much below these thresholds it falls and why.  Ever since 1991, regulators are supposed to grant banks little leeway on these capital requirements – “prompt corrective action” provisions demand that regulators sanction banks as capital plummets and close them if they haven’t already done so if ratio’s sink to the “critical-capital” threshold.

Faced with a Lehman-like run, Silvergate has understandably focused on assuring stakeholders that it can continue to sell assets to handle all withdrawals.  And so it may, but that’s not its only problem.  Even if it’s liquid, Silvergate faces a grim future if its regulatory-capital ratios falter – and they might.

To survive, Silvergate must run a gauntlet between the amount of capital it holds on a shrinking pool of assets and the capital costs of losses taken as assets are sold to handle withdrawals.  The bank entered the liquidity wringer with ample capital.  According to its third-quarter call report, its leverage ratio was over ten percent.  And, even when the bank dumped over …