On Friday, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) released reports regarding the fall of Silicon Valley Bank (SVB) and Signature Bank (SBNY), which were the second and third-largest U.S. bank failures in history. The Fed’s report, authored by Michael Barr, the vice chair for supervision, stated that the central bank’s supervisors failed to recognize the extent of vulnerabilities at SVB as it grew in size and complexity. Barr explained that SVB had 31 open supervisory findings while other banks had much fewer in comparison. The report offers a comprehensive perspective, noting that the Federal Reserve’s supervisory approach failed to fully contemplate the ramifications of rising interest rates. Then, a slowing activity in the technology sector ultimately paved the way for the demise of SVB.
Barr’s report mentions crypto three times and one instance is located on a bar chart describing risks. “As I have previously announced, the Federal Reserve has begun to build a dedicated novel activity supervisory group to focus on the risks of novel activities (such as fintech or crypto activities) as a complement to existing supervisory teams,” Barr stated. The report also mentions the systemic consequences that SVB’s failure posed, which the Federal Reserve’s tailoring framework did not contemplate.
On the other hand, the FDIC’s report authored by Marshall Gentry discusses how liquidity risk management witnessed withdrawals of uninsured deposits rise to critical levels. Throughout the report, Gentry discusses the turmoil in the crypto industry that bolstered SBNY’s failure. He stated that “The strategy exposed SBNY to greater susceptibility to liquidity, reputation, and regulatory risk due to the uncertainty and volatility of the digital asset space.” The report describes how two cryptocurrencies collapsed in May 2022 (terrausd and luna), leading to additional turbulence in the industry, and further discusses the collapse of FTX. It noted that SBNY’s shares were correlated with the crypto industry.
Both reports were approved by the Fed’s chair Jerome Powell and the FDIC’s chair Martin Gruenberg. The reports reveal how the banking industry is vulnerable to risks, and the need for more regulatory oversight in the fintech and crypto space has arisen. It shows that banking regulators are taking crypto assets seriously and recognize the potential risks that the technology poses to the industry.
The reports suggest that banking regulators are exploring the possibility of building a dedicated supervisory team to focus on the risks of novel activities, particularly in the fintech and crypto sectors. This team would complement the existing supervisory teams to offer a more comprehensive perspective on the risks posed by new technologies.
In conclusion, the reports published by the Federal Reserve and the FDIC on the fall of Silicon Valley Bank and Signature Bank indicate that the banking industry faces significant challenges, particularly when it comes to risk management and novel activities such as fintech and crypto. It demonstrates the need for more regulatory oversight and robust risk-management processes to ensure that banks remain resilient and can withstand the challenges posed by new technologies. The reports are a significant step towards building a stronger and more resilient banking system, and the hope is that regulators will continue to focus on the potential risks posed by new technologies moving forward.
