Fed warns banks of liquidity risks tied to crypto firms

Fed, FDIC and OCC issued a joint statement reminding U.S. banking institutions of the potential risks posed by crypto-service-focused firms.

@federalreserve @FDICgov @USOCC issue joint statement on liquidity risks resulting from crypto-asset market vulnerabilities: https://t.co/XDTOB0SvPJ

— Federal Reserve (@federalreserve) February 23, 2023

Regulators cited the “unpredictability of the scale and timing of deposit inflows and outflows” of such institutions.

Listed as risks in the document are:

• volatility of the crypto market;
• bank run risks (bank run) (as occurred with Terra USD);
• depegging of stablecoins from parity with fiat currency;
• periods of stress and panic among users due to market events, media reports and uncertainty.

“The stability of such deposits may be linked to demand for stablecoins, holders’ confidence in the ‘stablecoins’ and the reserve-management practices of their issuers,” the statement explains.

Regulators urged banks to monitor crypto firms that misstate or deliberately inform customers about the inclusion of client deposits in the FDIC insurance program.

In July 2022, similar claims arose against Voyager Digital, which was undergoing bankruptcy proceedings.

Liquidity risks for banks may be amplified by close ties among crypto firms or their similar operating profiles. In this case, fluctuations in deposit flows could be highly correlated, the experts explained.

The statement contains no new risk-management principles; it merely reminds banks to apply existing ones.

“Credit institutions are neither prohibited nor impeded from providing banking services to customers of any class or type, as permitted by law or regulations,” the document emphasises.

In January 2023, Signature Bank severed ties with Binance’s international business. On February 10 it emerged that NYDFS initiated an investigation into the exchange’s stablecoin issuer partner, BUSD. Later the regulator ordered Paxos to cease issuing them. Also, media reported that the SEC was prepared to sue the infrastructure company.

Earlier Bloomberg reported that the DOJ’s fraud unit is investigating Silvergate’s deals with the FTX platform and the related hedge fund Alameda Research.

For the quarter October–December 2022 the bank posted a loss of $1.05 billion. The deteriorating operating environment was triggered by the collapse of Sam Bankman-Fried’s exchange, which was a client of the bank.