Silvergate Bank’s Investment Strategy and Losses
It is reported that Silvergate Bank, a cryptofriendly bank, invested most of its new funds into longer-term bonds. Before its deposits began to shrink rapidly …
It is reported that Silvergate Bank, a cryptofriendly bank, invested most of its new funds into longer-term bonds. Before its deposits began to shrink rapidly at the end of the third quarter of last year, only 11% of its liquid assets were cash stored in the Federal Reserve Bank of the United States and other banks, and the rest were securities. Only 11% of these securities are U.S. treasury bond, and most of the rest are mortgage-backed bonds with a contractual maturity of more than 10 years. Therefore, before they began to sell these securities to meet their withdrawal needs, their bond holdings had suffered a fair value loss of $1 billion.
Only 11% of the liquid assets of Silvergate Bank before the deposit shrinkage were cash
Interpretation of the news:
The recent news that Silvergate Bank, known for its crypto-friendly policies, invested most of its new funds into longer-term bonds has raised concerns about the bank’s investment strategy. According to reports, before the end of the third quarter of 2020, only 11% of the bank’s liquid assets were cash stored in the Federal Reserve Bank of the United States and other banks, while the rest were securities.
Interestingly, only 11% of the bank’s securities were U.S. Treasury bonds, and most of the rest were mortgage-backed bonds with a contractual maturity of more than 10 years. This indicates that Silvergate Bank was looking for higher returns by investing in long-term bonds, which may have seemed like a good investment decision at the time.
However, the decline in deposits at the end of the third quarter of 2020 led the bank to sell its securities to meet withdrawal needs. As a result, their bond holdings suffered a fair value loss of $1 billion before they could sell them. This loss in fair value of their securities indicates the risks associated with investing in longer-term bonds.
It is worth noting that investing in longer-term bonds can offer higher yields in exchange for taking on additional risks, such as interest rate risk and credit risk. Interest rate risk arises when the interest rates increase, which can lead to a decline in the value of the bonds. Credit risk arises if the issuer of the bond defaults, which can lead to a loss of the principal amount invested.
In conclusion, Silvergate Bank’s investment strategy of investing in longer-term bonds for higher yields has backfired due to the decline in deposits and the need for liquidating its securities. This shows the importance of diversifying investments and considering the risks associated with each investment type. Additionally, the news serves as a reminder to investors of the potential consequences of investing in long-term bonds.
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