US Congressional Research Finds Perception of Crypto Risk Spurred Bank Withdrawals

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The Congressional Research Service found that crypto did have a role to play in the failure of Silvergate, Silicon Valley and Signature Bank, but only an indirect one based on risk perception.

The non-partisan agency, which acts as a trusted resource for members of Congress, published a report on Tuesday, which showed that the banks had limited exposure to high-profile crypto company failures. However, it disclosed that more than 90% of Silvergate’s deposits came from crypto clients.

The financial world truly saw some March Madness when Silvergate announced it would be winding down, Silicon Valley Bank failed suddenly, leaving the investment community reeling, and the smaller Signature Bank, was shuttered by regulators.

These banks were the victims of a deposit run, which means too many customers withdrew their funds and the banks couldn’t keep up, but their closure has been blamed on their coziness with the crypto industry — speciously according to congressional testimony.

These were the highlights from the Congressional Research report:

  • Silicon Valley Bank, Silvergate and Signature were all in on the crypto action, providing services to firms in the industry.
  • Among them, Silvergate was king, counting more than 90% of its deposits coming from crypto clients. Meanwhile, Signature Bank had only 20% of deposits in digital assets. SVB claimed to have “minimal exposure,” but Circle’s announcement that it held $3.3 billion of stablecoin reserves at SVB caused a bit of a stir when USDC temporarily depegged from the US dollar.
  • Silvergate offered bitcoin-collateralized loans to industry participants, holding $302 million in bitcoin-collateralized loans at the end of Sept. 2022.
  • Both Silvergate and Signature offered payment networks that facilitate real-time payments among crypto clients
  • Banks had limited exposure to high-profile crypto company failures, including Celsius and FTX.
  • Silvergate had less than 10% exposure to FTX, while Celsius’ deposits at Signature were an inconsequential 0.1%.
  • Crypto firm withdrawals during the bank run were proportional to the banks’ total deposits.
  • The crypto market downturn caused the banks to lose more deposits as centralized crypto platforms and stablecoin issuers experienced redemptions
  • Banks had to sell what they thought were safe and sound investments at a loss to meet withdrawal demand.
  • In conclusion, withdrawals of crypto deposits forced banks to sell other assets at a loss.

The report concluded that the recent failures of crypto-friendly banks have fuelled debate about whether they are managing the liquidity risks of the market well.

While banking regulators previously clarified that banks were “neither prohibited nor discouraged” from banking crypto, banks may be reticent to bank the industry,” Paul Tierno, analyst in financial economics at the Congressional Research Service wrote.

“Hesitancy to bank crypto may also highlight broader uncertainty regarding what constitutes appropriate practices in the absence of a more robust regulatory framework.”


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Source
US Congressional Research Finds Perception of Crypto Risk Spurred Bank Withdrawals is written by Shalini Nagarajan for blockworks.co

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