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After a trio of collapses among crypto-friendly banks, US lawmakers argue that Trump-era deregulation is to blame. Meanwhile, crypto firms seek out new banking partners willing to take a chance on the high-risk sector.
Over the past two weeks, the US has witnessed the second-largest bank failure in its history and the collapse of two other banks that were highly exposed to the crypto industry.
The largest of the three, Silicon Valley Bank (SVB), was seized by the California Department of Financial Protection and Innovation (DFPI), which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
Meanwhile, Silvergate Bank, opted for voluntary self-liquidation and Signature Bank was seized by the New York State Department of Financial Services (DFS), which likewise appointed the FDIC as receiver.
In the aftermath of the three collapses, US lawmakers have questioned whether more could have been done to identify the solvency issues at the banks at an earlier date.
In the case of SVB and Signature Bank, Senator Elizabeth Warren (D-MA) has argued that the banks’ troubles would have been spotted had it not been for the repeal of certain Dodd-Frank protections under President Trump.
“Make no mistake: this failure was the direct result of leaders in Washington weakening financial rules,” said Warren.
“Both SVB and Signature Bank suffered from a toxic mix of poor risk management and weak supervision.
“If Congress and the Federal Reserve had not rolled back key provisions of Dodd-Frank, these banks would have been subject to stronger liquidity and capital requirements to help withstand financial shocks.”
In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Act in an effort to protect consumers and ensure that large bank failures would not affect the wider economy.
Since then, according to Warren, Wall Street interests have spent “millions” trying to weaken the Dodd-Frank Act, and in 2018 they succeeded in doing so (with bipartisan support).
In 2018, the threshold for what constitutes a large, systematically important bank under Dodd-Frank was raised from $50bn in assets to $250bn in assets.
Above the threshold, banks must undergo regular stress tests and more aggressive supervision. But SVB, whose total assets peaked at $216bn in 2022, never quite reached the $250bn threshold.
“Because those stringent requirements were taken out of Dodd-Frank, when an old-fashioned bank run hit SVB, the bank couldn’t withstand the pressure,” said Warren.
Resurrecting Dodd-Frank protections
In response to the SVB and Signature Bank collapse, Warren has introduced the Secure Viable Banking Act with the support of 50 other Democrat lawmakers.
If passed, the two-page bill would simply restore the same Dodd-Frank protections that were repealed under President Trump, and future banks of SVB’s size would be subject to much tighter supervision.
However, it remains unclear whether under the original Dodd-Frank Act, the turbulence at SVB would have been detected before the bank collapsed.
For example, under the original Dodd-Frank Act, one significant rule that SVB would have been subject to is the liquidity coverage ratio (LCR).
Within a hypothetical 30-day stress period, the LCR requires that large banks hold government and corporate debt that can be easily converted into cash, in an amount equal to or greater than its projected cash outflows minus its projected cash inflows.
But as Bill Nelson, executive VP and chief economist at the Bank Policy Institute, (BPI) has written, even if SVB was subject to the LCR it “probably” would have received a passing score.
“Its problem was not that it did not hold liquid securities like Treasuries and agency-guaranteed mortgage-backed securities,” said Nelson.
“Its problem was that those securities were long-term and paid low interest rates, and thus suffered extraordinary losses when rates rose. That’s not a problem that the LCR is designed to catch.”
Marc Rubenstein, former hedge fund manager at Lansdowne Partners, has also written that it was interest rate risk that brought down SVB.
As interest rates began to rise in 2022, the price of SVB’s hold-to-maturity (HTM) bonds began to collapse, resulting in massive unrealised losses for the bank.
In June 2021, SVB had zero unrealised losses from HTM assets such as US Treasury bonds and mortgage-backed securities. But by September last year, these unrealised losses had grown to $16bn.
Technically, Rubenstein said SVB was already insolvent at the end of September last year. But since these losses did not have to be recorded on the bank's book, and neither the CEO or CFO had anticipated a run on deposits, they were concealed from customers and investors.
Instead, it was not until last Wednesday (March 8) that SVB’s larger depositors began to sense danger at the bank.
That day — which, by coincidence, was the same day that Silvergate Bank announced plans to self-liquidate — SVB announced plans to raise cash by offering $1.25bn in new stock sales.
The next day, key customers of SVB, such as Peter Thiel’s Founders Fund, began to withdraw their money from the bank and encouraged others to do the same.
Circle finds replacement for SVB
Prior to its collapse and receivership, SVB held deposits for some of the biggest names in crypto, including Circle, Ripple, Pantera, Avalanche and BlockFi.
Earlier this week, VIXIO reported that Circle held $3.3bn in an SVB deposit account and was unable to withdraw before the bank entered receivership.
Over the weekend, news of Circle’s frozen funds led to a run on USDC, the Circle-issued stablecoin, creating a backlog of redemptions going into this week.
This week, Circle said it had regained access to its SVB account and had begun to process redemptions using Cross River Bank, its new transaction banking partner.
At the end of Wednesday (March 15), Circle said it had redeemed $3.8bn and minted $0.8bn of USDC, which it described as “substantially all” of the backlogged requests.
New crypto bank on the block
Based in New Jersey, Cross River is a single-branch bank with just over 850 employees, which describes itself as a “digital infrastructure bank”.
Founded in 2008, Cross River has taken on several major crypto-native and crypto-linked firms as infrastructure clients, including Coinbase, eToro, Stripe, Plaid and Checkout.com.
For example, Cross River built the fiat-to-crypto on-ramps and off-ramps for Coinbase, a partnership for which it won a LendIt Fintech Industry Award in 2022.
Later in 2022, Cross River was valued at $3bn and raised $620m in capital from investors led by Andreessen Horowitz.
Despite Cross River’s crypto connections, it was invited to participate in the 2021 pilot of the FedNow instant payments system, which will go live in July this year.
But Cross River’s biggest publicity came in 2020, during the early days of the pandemic, when the bank made more than 100,000 loans to small businesses under the Federal Paycheck Protection Plan (PPP).
In total, only three other banks issued more PPP loans than Cross River, namely Bank of America, J.P. Morgan and Wells Fargo.
Based on its most recent regulatory filing, Cross River’s total assets now stand at $9.1bn, putting it comfortably below the Dodd-Frank protections that would be set to return under Warren’s Secure Viable Banking Act.
With the major crypto-friendly incumbent banks now having folded, Cross River could emerge from this tough period as a vital partner for the crypto industry.
