Crypto-friendly banks mismanaged traditional risks, FDIC chief tells Senate hearing

by · March 29, 2023

The US Senate Banking Committee held a hearing on March 28 regarding regulatory responses to recent bank failures. Officials from the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury testified. FDIC Chairman Martin Gruenberg spoke about the causes of the failures of Silicon Valley Bank (SVB) and Signature Bank, including the role of digital assets and the agency’s response to the crisis.

High levels of uninsured deposits and rapid growth were common factors in the March bank collapses, Gruenberg said. Gruenberg’s narrative began with the closing of digital asset-focused Silvergate Bank, which was announced on March 8, although that story began with the bankruptcy of FTX.

FTX represented less than 10% of Silvergate Bank’s total deposits, but the bank lost 68% of its deposits in the wake of FTX’s bankruptcy, setting off a fatal chain of events for the bank. Gruenberg said:

“The woes experienced by Silvergate Bank showed how traditional banking risks, […] when not administered adequately, it can combine to lead to a poor outcome.”

The FDIC was informed of the drive on SVB on the evening of Thursday 9 March. SVB closed on March 10 and the FDIC worked with the bank throughout the weekend, and succeeded in reopening the bridge bank the following Monday. Gruenberg noted that SVB, like Silvergate Bank, had concentrated its activities in a single sector – venture capital companies.

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Signature Bank was more diversified than Silvergate Bank or SVB. That was partly due to the bank’s decision to reduce exposure to digital assets following the FTX bankruptcy and media scrutiny of the bank’s ties to the crypto exchange. The bank received more negative attention linked to FTX in February, when it was sued for allegedly facilitating FTX’s commingling of accounts.

Deposit withdrawals from Signature Bank began on March 9 and became urgent the following day, Friday, with approximately 20% of deposits withdrawn within hours. Management was unable to provide accurate financial data and the situation worsened. Gruenberg said:

“Resolving the negative balance required a protracted joint effort between Signature Bank, regulators and the Federal Home Loan Bank of New York to post collateral and obtain the necessary funding from the Federal Reserve’s discount window to cover the negative outflows.”

“This was accomplished with minutes to spare before the Federal Reserve wire room closed,” he added.

Gruenberg noted that Silvergate Bank and Signature Bank used digital platforms that made it possible to conduct transactions around the clock. They were “the only two known platforms of this type within US insured institutions.”

Gruenberg gave a preliminary estimate of $22.5 billion for the cost to the Deposit Insurance Fund to resolve SVB and Signature Bank losses. Echoing several government officials in recent days, he added:

“The state of the US financial system remains healthy despite recent events.”

The FDIC will issue a comprehensive report on the deposit insurance system; The FDIC’s chief risk officer will release a report on the company’s oversight of Signature Bank by May 1. In addition, the FDIC will issue a proposed new rulemaking on the special assessment that month.

The other speakers at the hearing gave shorter explanations. Treasury Undersecretary for Domestic Finance Nellie Liang described how the Treasury Department engaged with the FDIC and the Federal Reserve during the bank failures. Fed Deputy Chairman for Supervision Michael S. Barr discussed in rather technical terms the SVB failure and the subsequent steps taken by the government.

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