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(Kitco News) -
A new report from the Congressional Research Service (CRS) showed that crypto losses did not cause the collapses of Silicon Valley Bank and Signature Bank, or even Silvergate, but fear of crypto exposure was the driving force behind the bank runs.
The CRS, a non-partisan agency which acts as a trusted resource to inform members of Congress, published ‘The Role of Cryptocurrency in the Failures of Silvergate, Silicon Valley, and Signature Banks’ on Tuesday. The report contradicts the popular narrative that the banks’ failures were caused by significant exposure to FTX and other failed crypto firms, or by losses from their own crypto products, even as it acknowledged that 90% of Silvergate’s deposits came from crypto clients at the time of its collapse, which was actually down from over 98% at the end of 2021.
“It is tempting to look for causal relationships between banking failures and specific crypto industry failures,” the report said, noting that even the banks that did business with high-profile crypto failures, such as Celsius and FTX, had only limited exposure to their collapses.
“At Silvergate, exposure to FTX was limited to holding deposits, which were less than 10% of Silvergate’s total. Celsius reportedly held $130 million at Signature, which in July 2022 represented little more than 0.1% of Signature’s total deposits. While FTX held deposits at Signature, those also represented around 0.1% of Signature’s deposits.”
The report cited congressional testimony from New York State Department of Financial Services Superintendent Adrienne Harris, who called allegations that Signature failed due to crypto a “misnomer” and said that “crypto withdrawals during the bank run were proportional to the bank’s total crypto deposits.”
Even Silvergate’s Bitcoin collateralized loans, which the report said were perceived as “risky” due to Bitcoin’s volatility, performed “as expected, with no losses or forced liquidations,” according to company CEO Alan Lane on a Jan. 17 conference call with the SEC.
“That said, perceptions of a bank’s riskiness because of its crypto exposure may have driven non-crypto firms/individuals to make significant withdrawals,” the CRS wrote.
The report said that the problems at these banks began as crypto prices fell precipitously throughout 2022. “As digital asset prices fell, centralized crypto platforms and stablecoin issuers experienced redemptions, likely causing them to draw down deposits held at these banks,” they wrote. “To meet withdrawal demand, banks sold ostensibly safe securities for losses, affecting their liquidity and—in some cases—their solvency.”
Silvergate’s deposits fell by more than 50% in Q4 2022, the report noted, while Signature’s deposits fell by approximately 15% during the same period. “So in this case, losses were not realized on crypto-related assets, but crypto deposit withdrawals caused banks to sell other assets at a loss.”
The report concludes by saying that “the loss of two crypto-friendly banks has revived concerns that crypto firms lack banking options,” and that even though banking regulators claim that banks were “neither prohibited nor discouraged” from banking crypto firms, banks may still be spurning the industry.
“Hesitancy to bank crypto may also highlight broader uncertainty regarding what constitutes appropriate practices in the absence of a more robust regulatory framework,” they wrote.
