FDIC Blames Crypto for Bank Collapses: Analyzing Risk Factors and Future Implications

Dramatic evening sky over a crumbling bank building, strong chiaroscuro lighting, ominous shadows, Baroque-inspired style, tense mood. Desolate street, cracked pavements, scattered cryptocurrencies, soft sunset glow, high-contrast color palette. Overarching theme: downfall of crypto banks due to risk and regulation.

The Federal Deposit Insurance Corporation (FDIC) has recently made headlines by pointing fingers at cryptocurrencies for the collapse of Signature Bank, alongside poor management. The FDIC chair, Martin Gruenberg, discussed the factors leading to the bank’s demise during a US House of Representatives hearing. Gruenberg attributed non-compliance with risk controls and lack of proper governance as significant contributors to the fall of this once crypto-friendly financial institution.

In addition to poor management, Gruenberg also highlighted the risks accompanying excessive dependence on uninsured crypto deposits. With the crypto market still reeling from the crisis of late 2022, it is unsurprising to see concern arising from investments in such volatile assets. Gruenberg’s discourse pointed to the collapse of other US-based crypto banks such as Silicon Valley Bank (SVB) and Silvergate Bank, which resulted in significant losses of $16.1 billion and $2.4 billion, respectively. Furthermore, the subsequent closure of First Republic Bank added another $13 billion to the total losses.

Given this tumultuous backdrop, it is evident that sizable banks deserve greater scrutiny and more stringent long-term debt requirements for maintaining stability in the financial system. As per the FDIC’s previous report, both management and board members of Signature Bank were guilty of prioritizing growth over risk management – ignoring the concerns and recommendations of FDIC examiners in the process.

The considerable stock price drops that ensued were a consequence of the contagion effect spreading from SVB’s collapse. With news disseminating through media channels and social media platforms, panic ensues, resulting in an overwhelming bank run. This scenario demonstrates how interconnected the financial sector is, underscoring the importance of sound governance and responsible investments for its stability.

In a preliminary review of the said bank failures, the US Government Accountability Office (GAO) cited the banks’ exposure to cryptocurrencies as a contributing factor. Although regulators and banking executives agree on the central role deposit runs played, former SVB CEO Greg Becker attributed the bank’s downfall to rising interest rates. According to Becker, no bank could withstand such a massive deposit run.

For US regulators and anti-crypto lawmakers, the high-profile collapses of crypto-friendly banks serve as examples when discussing the future regulation of digital assets. Given that cryptocurrencies are not likely to vanish anytime soon, the ongoing debate around the benefits and drawbacks of crypto investments will continue to pervade worldwide financial circles.

In the end, while cryptocurrencies and their inherent risks have played a part in the downfall of these banks, it is crucial to remember that poor management and lack of adherence to risk control measures were also significant factors. To ensure the financial industry’s resilience and stability, a more balanced approach that accounts for emerging technologies while maintaining strong governance practices is essential.

Source: Cryptonews

Sponsored ad