Only 11% of the liquid assets of Silvergate Bank before the deposit shrinkage were cash

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.

Interpretation of this information:

The message above talks about the investment strategy of Silvergate Bank, a cryptofriendly bank. According to the report, the bank invested most of its new funds into longer-term bonds. However, towards the end of the third quarter of the previous year, its deposits began to shrink rapidly, and as a result, the bank had to sell off some of its securities to meet its withdrawal needs.

Before this happened, only 11% of Silvergate Bank’s liquid assets were cash stored in the Federal Reserve Bank of the United States and other banks. The remaining assets were in the form of securities, which included U.S. treasury bonds and mortgage-backed bonds. Of these securities, only 11% were in the form of U.S. treasury bonds, and the majority of the rest were mortgage-backed bonds with a contractual maturity of more than 10 years.

Although this investment strategy may have seemed attractive at first, the bank suffered a fair value loss of $1 billion when it had to sell off some of its longer-term bonds to meet its withdrawal needs. This loss highlights the risks associated with long-term investments, especially when liquidity requirements arise.

There are a few possible interpretations of this message. First and foremost, it underscores the importance of diversification in investment portfolios. While longer-term bonds may offer attractive yields, they also expose investors to significant risks, particularly when there are liquidity concerns. By diversifying their holdings across various asset classes, investors can mitigate these risks and ensure that their portfolios are better equipped to withstand market turbulence.

Another possible interpretation of this message is that it highlights the challenges that cryptofriendly banks face when it comes to managing their assets. Cryptocurrency is a relatively new asset class, and financial institutions that specialize in it may be more susceptible to volatility and other market movements. As such, managing liquidity and maintaining the stability of their portfolios can be a complex and challenging task.

Overall, the message above serves as a cautionary tale for investors to conduct due diligence and carefully consider the risks associated with long-term investments. As the market continues to evolve, financial institutions will need to adapt their investment strategies to stay ahead of the curve and mitigate potential risks.