One of the great regulatory achievements of the Biden era was to keep the crypto bubble isolated in its own territory, away from the banking system. As a result, scalpers and crypto-suckers lose their money, but have no impact on the wider financial economy.
The hero of this achievement is SEC Chairman Gary Gensler, who uses his authority in many ways. As David Dayne of Prospectus writes, Gensler suggested in a newsletter last April that banks should label digital assets on their balance sheets as liabilities for accounting purposes. Gensler is blocking the creation of an exchange-traded fund of bitcoin funds, which would increase the bank's exposure to the crypto. After the FTX collapse made it difficult for crypto companies to go public with stock offerings, Gensler published 16 questions crypto companies want to address in public filings.
For the most part, banking regulators followed Gensler's lead when the Federal Reserve denied Custodia, a Wyoming-based crypto-focused bank, access to key accounts. But a major flaw in the system is the weakening of FDIC regulations, which Trump appointees repealed in 2020 to make FDIC-insured banks more vulnerable to intermediary funds; And that can include crypto-assets. When deposits are traded in bulk, it's all too easy for banks to ignore what's inside.
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Last week, American Banker published an article linking Silvergate, a tainted San Diego bank, to a savings shortfall caused by brokers. Silvergate saw a sharp decline in deposits in the last quarter of 2022 when it saw outflows of $8.1 billion, prompting the bank to approach San Francisco-based Federal Home Loan Bank for an advance. emergency $4 at $0.3 billion, reducing Silvergate's stake by 84 percent. the bank must sell the assets at a loss to cover the payment.
According to American Banker , Silvergate's $4.6 billion in cash at the beginning of January was almost all in bank advances on home loans. This shows that SilverGate, whose farm is betting on crypto, is on the verge of bankruptcy. The Senate Banking Committee has been investigating since December, and a bipartisan group of senators on the committee were unhappy with Silvergate's failure to respond.
But the relationship between trading deposits and cryptos may not be what the US banker describes. A closer look shows that Silvergate is pursuing a disastrous strategy of positioning itself as only a banker to the crypto industry, and Gensler is ignoring the regulations of the SEC and other regulators to limit its exposure. When the crypto companies that had invested heavily in Silvergate started releasing their shirts, there was a huge uproar.
This suggests that regulators should be vigilant to ensure that banks are not unknowingly breaking the law and that violators should be prosecuted. Big banks are largely regulated by the SEC's Gensler actions, reinforced by other regulators. A joint statement released on January 3 by the FDIC, the Federal Reserve and the Office of the Comptroller of the Bank in general warned banks to be wary of crypto-assets and mandated regulatory oversight. One regulator that stands out for not reporting is the Commodity Futures Trading Commission, which has been a shameless cheerleader for the crypto industry.
Regulators must be vigilant to ensure banks are not willfully breaking the law.
The Biden administration, which has already dabbled a bit with crypto, recently closed the door on the industry with this directive, "to continue to push regulators ... to address and limit exposure of financial institutions to digital assets."
However, lax rules on agent deposits meant that an accident would occur. Intermediate deposits were heavily implicated in the savings and loan collapse of the 1980s and 1990s. That experience, and the violations that led to the massive financial collapse in 2008, led to the FDIC's original rules limiting brokered deposits, which were repealed by Trump appointees.
Martin Gruenberg, the only Democrat on the FDIC board in 2020, voted against relaxing the rules and warned of serious risks to the banking system. Today, Gruenberg is chairman of the FDIC, and progressive regulators make up the majority of the board. Council members are expected to approve new regulations and increase restrictions on negotiated deposits, although they have other priorities.
There are two moral messages in this story. For one thing, a controller is only as good as a controller. The weakening of negotiated deposit rules is a classic case of when industry affiliates take ownership of the rules.
Another moral is that the financial industry is constantly finding new ways to take risks and promise insiders to get rich. Crypto joins a long list of confusing innovations, including credit derivatives and subprime mortgages. It takes very smart, public and courageous regulators to keep up with these systems and protect the public, especially when the new systems don't fit easily into the old regulatory service.
The two managers are Gary Gensler and Martin Gruenberg. Ironically, allies in the crypto industry who shamed Gensler in the press when the crypto bubble burst last year are now attacking him for not doing enough.
Alas, each new revelation makes it clear that Gensler is a hero, and more to come.