FDIC, Federal Reserve Reveal Major Reason For Crypto-Friendly Banks' Collapse

Top officials of the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve revealed the major reason behind the collapse of crypto-friendly banks while assuring the public that the American banking system is still sound.

On Tuesday, the United States Senate Banking Committee held a hearing concerning the regulatory response to a series of bank failures, which shook and terrified the markets and threatened the country's financial system.

The hearing was attended by the FDIC and Federal Reserve, whose officials testified before the lawmakers.

FDIC chair Martin Gruenberg discussed the causes of the collapse of Silicon Valley Bank and Signature Bank, as well as the crucial role of the agency's responses to the crisis and the role of digital assets.

According to the chairman, rapid growth and high levels of uninsured clients were the factors that contributed to the banks' collapse this month. He also underlined that the story began with the bankruptcy of the controversial crypto empire FTX followed by the closing of the crypto-friendly bank Silvergate.

Sam Bankman-Fried's FTX owns less than 10% of Silvergate's total deposits but the crypto-friendly lender lost 68% of its deposits following the empire's bankruptcy, which triggered a chain of events that led to where the bank currently is.

"The troubles experienced by Silvergate Bank demonstrated how traditional banking risks, [...] when not managed adequately, could combine to lead to a bad outcome," Gruenberg said.

Meanwhile, Federal Reserve Vice Chair of Supervision Michael Barr told Congress that Silicon Valley Bank's failure is a "textbook case of mismanagement."

"SVB failed because the bank's management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours," he added.

Silicon Valley Bank's collapse would cost FDIC around $20 billion to cover the cost, along with the $18 billion for the uncovered deposits.

"SVB's failure demands a thorough review of what happened, including the Federal Reserve's oversight of the bank," FDIC chair Barr said in his testimony, adding that he is "committed to ensuring that the Federal Reserve fully accounts for any supervisory or regulatory failings and that we fully address what went wrong."

Gruenberg also estimated that Signature Bank's failure would require about $2.5 billion and another $16 billion for the coverage of uninsured deposits.

"I would emphasize that these estimates are subject to significant uncertainty and are likely to change, depending on the ultimate value realized from each receivership," Gruenberg said in his written testimony."

"The state of the U.S. financial system remains sound despite recent events," Barr assured.

FDIC was appointed to manage both collapsed banks.