Biden is pushing US regulators to tighten banking rules

The crypto industry and the banking sector are closely correlated, with many crypto exchanges using banks to hold funds and process transactions.

Changes in banking regulations could affect the crypto industry, which has sought greater legitimacy and integration with traditional financial systems.

US President Joe Biden is increasing pressure on federal banking regulators to tighten rules for regional banks and require institutions the size of Silicon Valley Bank to maintain a greater amount of liquid assets while undergoing more frequent stress tests.

The California Department of Financial Protection and Innovation ordered the closure of Silicon Valley Bank this month, which was headquartered in Santa Clara, California.

Silicon Valley Bank lost $42 billion in one day due to many depositors withdrawing money using online platforms.

Biden to Fed: Tighten banking rules

The aim of tightening the rules for regional banks is to increase the stability of the financial system and reduce the risk of bank failure.

Banks will be required to maintain a higher level of readily available assets that can be quickly converted into cash in times of financial stress, thereby securing customer deposits and preventing market-wide disruptions.

The White House announced the changes Thursday, which can be implemented by current banking regulators, including the Federal Reserve, without the need for new legislation.

The implication of this action is that banking regulations can be changed quickly without the need to introduce new laws, indicating a potential impact on the crypto industry.

President Joe Biden. Image: Tom Williams/CQ Roll Call/file photo.

This means that the regulatory environment for the banks, and indirectly for the crypto industry, can change faster than if new legislation were necessary.

A White House fact sheet reveals that the Biden administration is urging the Federal Reserve and other independent organizations to strengthen regulations aimed at reducing banks’ reliance on debt and increasing their liquidity.

In 2018, the Trump administration loosened oversight of regional banks through a bipartisan bill, changing the definition of “systemically important” banks to those with at least $250 billion in assets, reversing the stringent requirements put in place by Congress after the 2008 financial crisis.

A Republican lawmaker criticized the U.S. central bank for not holding lenders like Silicon Valley Bank accountable when it has the power to do so.

Patrick McHenry, chairman of the House Financial Services Committee, suggests holding regulators accountable for their failure to use their oversight tools during bank failures rather than giving them more authority.

Michael Barr, head of banking regulation at the Fed, expressed the need for stronger capital and liquidity requirements.

Image: Canva

The Fed’s authority in adjusting rules

In 2019, the Fed used its power to adjust those rules, drawing objections from officials including Martin Gruenberg, the current chairman of the Federal Deposit Insurance Corporation.

The central bank’s decision to exempt lenders with assets of $100-250 billion from maintaining a standardized “liquidity coverage ratio” has drawn attention.

The ratio measures whether a lender has enough high-quality liquid assets to survive a crisis. SVB’s lack of liquidity was a significant problem as deposits left the bank and the value of its assets declined, leading to its failure.

The Biden administration is pushing for stricter banking regulations for regional banks, especially those of similar asset sizes to SVB, in response to its failure and the potential risk those banks pose.

The aim is to prevent future failures and provide greater protection to depositors and the financial system.

Crypto total market cap still pegged at $1 trillion on the daily chart at TradingView.com

Crypto can benefit from strict banking regulations

Meanwhile, the crypto industry could indirectly benefit from the US government tightening its rules on the banking sector in a few ways.

Tighter banking regulations can lead to a more stable financial system overall. This could help boost investor confidence in the broader financial markets, including cryptocurrencies, which are often seen as a speculative asset class.

As cryptocurrencies continue to grow in popularity and adoption, greater regulatory oversight could help increase their legitimacy in the eyes of traditional investors and institutions. A more regulated banking system could also help improve the reputation of the cryptocurrency industry as a whole.

Tighter banking regulations could lead to stronger anti-money laundering (AML) and know-your-customer (KYC) practices. This can help reduce fraud and criminal activities in the crypto industry and increase confidence among investors and consumers.

– Featured image from Finance Magnates