A recent report from the Congressional Research Service (CRS) suggests that cryptocurrency losses did not cause the failures of Silvergate, Silicon Valley Bank, and Signature Bank. Instead, the report suggests that the driving force behind the bank runs was fear of crypto exposure. The CRS is a non-partisan agency that provides Congress with trusted resources and published ‘The Role of Cryptocurrency in the Failures of Silvergate, Silicon Valley, and Signature Banks’ on Tuesday.
Contrary to 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, the CRS report revealed that even the banks that did business with high-profile crypto failures had only limited exposure to their collapses. At Silvergate, for example, 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.
“It is tempting to look for causal relationships between banking failures and specific crypto industry failures,” the report said. “Perceptions of a bank’s riskiness because of its crypto exposure may have driven non-crypto firms/individuals to make significant withdrawals.”
The report suggests 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, causing them to draw down deposits held at these banks. 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, 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 banks may still be spurning the industry, despite banking regulators claiming that banks were “neither prohibited nor discouraged” from banking crypto firms. The report suggests that “hesitancy to bank crypto may also highlight broader uncertainty regarding what constitutes appropriate practices in the absence of a more robust regulatory framework.”
It’s worth noting 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. However, the report suggests that even with such a high proportion of crypto clients, losses were not realized on crypto-related assets.
The CRS report contradicts the popular narrative that crypto losses caused the collapses of Silicon Valley Bank and Signature Bank, or even Silvergate. Instead, it suggests that the bank runs were caused by fear of crypto exposure. Despite banking regulators claiming that banks were not prohibited from banking crypto firms, the report suggests that banks may still be spurning the industry due to broader uncertainty regarding appropriate practices in the absence of a more robust regulatory framework.
