Today’s Banking Crisis: The Interplay of Regulation, Supervision, and Cryptocurrency

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The recent banking crisis has sparked much debate over its primary causes. For example, a report by Michael S. Barr, Vice Chair of Supervision at the Federal Reserve, suggests that insufficient regulation and supervision bear the brunt of the responsibility. In contrast, the Congressional Research Service highlights the role of cryptocurrency in exacerbating the crisis. These differing perspectives emphasize the complex nature of the financial landscape and the need for robust oversight.

The Regulatory Landscape: A Causal Factor in Bank Failures

Barr’s report focuses on the regulatory environment during the Trump administration, which saw significant banking sector deregulation. Key changes included:

  • The rollback of the Dodd-Frank Act.
  • Easing of the Volcker Rule.
  • The weakening of the Consumer Financial Protection Bureau.

The report asserts that the 2019 Economic Growth, Regulatory Relief, and Consumer Protection Act led to lower supervisory and regulatory requirements for banks such as Silicon Valley Bank (SVB).

The report argues that more robust supervisory and regulatory requirements could have bolstered the resilience of banks like SVB. In March 2023, state regulators shut down SVB following a bank run, marking the second-largest bank failure in United States history. Signature and Silvergate banks also failed that month, highlighting the need for a more robust regulatory framework.

Strengthening the Supervisory and Regulatory Framework

Barr’s report calls for enhanced supervisory and regulatory frameworks, emphasizing the importance of solid bank capital and continuous evaluation of emerging risks. A more robust framework could improve supervision speed, force, and agility, particularly for rapidly growing firms and those with high-risk factors.

President Joe Biden has also urged Congress to introduce stricter regulations to prevent similar bank failures in the future.

A report by the Congressional Research Service offers a different perspective on the banking crisis, examining the role of cryptocurrency in the collapse of SVB, Signature Bank, and Silvergate Bank. The report notes that all three banks had exposure to the cryptocurrency industry through deposits, loans, and payment networks.

Silvergate Bank had the highest concentration in the crypto industry, with over 90% of its deposits from crypto clients. SVB and Signature Bank, on the other hand, had more modest exposure.

The report establishes links between banking failures and specific crypto company failures, attributing the depletion of deposits to cryptocurrency volatility. For example, sometimes, banks resorted to selling ostensibly safe securities at a loss to meet withdrawal demands.

Balancing Regulation and Innovation

The divergent conclusions of the Barr report and the Congressional Research Service study underscore the multifaceted nature of the recent banking crisis. While regulatory and supervisory shortcomings played a significant role, the influence of cryptocurrency cannot be overlooked.

As the financial landscape evolves, balancing fostering innovation and ensuring robust regulation and supervision is crucial. Policymakers must address the regulatory environment and the growing impact of cryptocurrencies to promote a stable, resilient banking system.

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