- The Basel Committee on Banking Supervision is considering revealing banks’ cryptocurrency holdings as a potential factor in the downfall of several banks.
- The committee examined the reasons behind the failures of institutions like Silicon Valley Bank, Signature Bank of New York, First Republic Bank, and Credit Suisse.
- Signature Bank’s heavy reliance on digital asset clients led to its downfall during the “crypto winter” in 2022.
In the wake of this year’s banking crisis, the Basel Committee on Banking Supervision, which operates under the Bank for International Settlements, is contemplating the idea of banks revealing their holdings of cryptocurrency assets. This committee has identified cryptocurrency asset holdings as a potential factor contributing to the recent downfall of several banks.
During their meeting on October 4-5, the committee examined the underlying reasons behind the failures of institutions such as Silicon Valley Bank, Signature Bank of New York, First Republic Bank, and the near-collapse of Credit Suisse, which was eventually acquired by UBS. The committee’s report highlights three key structural trends that may have indirectly played a role in these failures: the increasing influence of nonbank intermediaries, the concentration of cryptocurrency assets within a limited number of banks, and the swift movement of customer funds driven by the growing shift towards digitalization.
The report singles out the impact of cryptocurrency on the demise of Signature Bank, emphasizing that the bank’s heavy reliance on digital asset clients left it vulnerable when the cryptocurrency market experienced a downturn, often referred to as the “crypto winter,” in 2022. Insufficient governance and inadequate risk management practices further hindered the bank’s ability to handle liquidity challenges during times of stress. It’s worth noting that while cryptocurrency played a role in Signature Bank’s troubles, regulatory authorities clarified that it wasn’t the primary reason for the bank’s closure by the New York State Department of Financial Services on March 12.
Importantly, this discussion within the Basel Committee does not necessarily indicate imminent revisions to the Basel Framework. In January, the committee had already made amendments to its framework, limiting the inclusion of cryptocurrency assets in bank reserves to a maximum of 2%. The report suggests that a consultation paper on the disclosure of cryptocurrency asset exposure will soon be published for further consideration.
This discussion marks the latest in a series of evaluations of the challenges faced by banks during the events of March. In April, the United States Federal Reserve Bank and the Federal Deposit Insurance Corporation (FDIC) released their findings on these events, with the FDIC revisiting the matter in August.
Basel Committee on Banking Supervision (BCBS)
The Basel Committee on Banking Supervision (BCBS) is the main organization responsible for setting global standards for bank regulation and facilitating cooperation among central banks and bank supervisors from 28 jurisdictions, with 45 members in total.