GAO Identifies Key Factors in Bank Failures: The Role of Crypto Exposed

Understanding the GAO’s Observations

The Government Accountability Office (GAO) made headlines with its precise dissection of the implosions at Silicon Valley Bank and Signature Bank. In its report released on May 11, the GAO pointed to ‘poor governance and unsatisfactory risk-management practices’ as the main culprits behind Signature Bank’s collapse in March. While the report does not directly tie the bank’s downfall to the crypto sector, it sheds light on their exposure to it among other contributory factors.

Liquidity Trouble Brews

Signature Bank was not just a bystander in the crypto wave; it had a significant exposure to the digital assets market, with about $12 billion in deposits connected to crypto firms in 2022. As the liquidity crisis loomed, the report noted that Signature’s management seemed to falter in grasping their liquidity positions, especially in the crisis moments leading to the failure.

Regulatory Oversight: Where Were They?

During a recent hearing, GAO director Michael Clements let it slip that regulatory authorities were well aware of the looming threats at Silicon Valley Bank and Signature Bank, yet failed to take immediate action. Representative John Rose from Tennessee didn’t hold back, pushing for clarity on whether large deposits from the crypto industry were factored into the banks’ operational failures.

Varied Perceptions on Crypto’s Role

Not everyone agrees on the extent of crypto’s involvement in the banking chaos. For instance, Adrienne Harris, head of New York’s financial regulators, characterized the collapse of Signature Bank as a traditional bank run rather than a crypto-related collapse. Who knew bank runs could come in flavors?

Post-Failure Reactions in the Crypto Community

In the wake of these bank failures, it’s been a bit of a mixed bag for crypto firms. Some, like BlockFi and Gemini, came forth, claiming they were either well shielded from the fallout or had zero exposure to those troubled banks. Meanwhile, discussions continue to bubble around the fragile relationship between conventional banking systems and the wild world of cryptocurrencies.