April 19, 2024
lingering effects of the banking crisis
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Crypto Asset Ownership Blamed for Bank Failures: Basel Committee’s Findings

The aftermath of the banking crisis earlier this year continues as the Basel Committee on Banking Supervision contemplates the potential requirement for banks to divulge their crypto asset holdings. The committee, operating under the Bank for International Settlements, has identified crypto asset ownership as a key factor contributing to the downfall of several banks in March.

During its meeting on October 4–5, the committee scrutinized the root causes of the failures of Silicon Valley Bank, Signature Bank of New York, and First Republic Bank, along with the near-collapse of Credit Suisse, which was subsequently acquired by its rival, UBS. According to the committee’s report, three underlying trends may have indirectly played a part in the banks’ failures: the growing prominence of nonbank intermediation in recent years, the concentration of crypto assets within a small number of banks, and the accelerated fund mobility enabled by increasing digitalization.

The report also conducted a thorough examination of policy issues, with a particular emphasis on the role of crypto in Signature Bank’s failure. The committee discovered that Signature Bank’s significant concentration of digital asset companies made it vulnerable when the crypto winter hit in 2022. Furthermore, the bank’s subpar governance and insufficient risk management practices left it ill-equipped to manage its liquidity effectively during times of stress. The New York State Department of Financial Services closed Signature Bank on March 12, but regulators clarified that their decision was not primarily linked to crypto.

The report clarified that this discussion does not necessarily imply forthcoming revisions to the Basel Framework. In January, the committee had already made amendments to limit the inclusion of crypto assets in bank reserves to 2%. A statement accompanying the report announced that a consultation paper on disclosing exposure to crypto assets would be released soon.

This latest review revisits the challenges faced by the banks in March, following previous assessments by the United States Federal Reserve Bank and the Federal Deposit Insurance Corporation (FDIC) in April, with the FDIC reevaluating the situation in August.

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