A report by the Congressional Research Service (CRS) has outlined the role of cryptocurrency in the failures of banks Silvergate, Silicon Valley, and Signature, stating that while the banks’ exposure to crypto was minimal, the perception of risk “may have driven non-crypto firms/individuals to make significant withdrawals.”
Analyst Paul Tierno from CRS, a nonpartisan agency that serves to inform Congress, concluded in their report that “volatility in crypto markets may expose banks to liquidity risks that could ultimately lead to fatal losses,” but contrary to beliefs, the banks’ exposure to crypto “was somewhat limited.” Dwindling deposits from crypto firms led banks to sell securities at a loss, which exacerbated liquidity issues and solvency.
“After reaching an all-time high of around $3 trillion in November 2021, crypto lost more than two-thirds of its market capitalization by December 2022,” Tierno wrote. “As digital asset prices fell, centralized crypto platforms and stablecoin issuers experienced redemptions, likely 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.”
The report explained that in Q4 2022, Silvergate’s deposits fell by more than half, while Signature’s deposits dropped by 15% over the same period. “So in this case, losses were not realised on crypto-related assets, but crypto deposit withdrawals caused banks to sell other assets at a loss.”
The report by CRS serves as a reminder that crypto market chaos affected US bank stocks — and that SVB, Silvergate, and Signature were pushed over the edge by fear, uncertainty, and doubt.