#crypto

24 02, 2023

FedFin on: Custody Reform

Arezou Rafikian2023-02-24T16:53:29-05:00February 24th, 2023|The Vault|

Making full use of powers granted in the 2010 Dodd-Frank Act, the SEC is proposing a wholesale rewrite of the rules dictating how investment advisers must place assets in custody and which institutions are considered qualified for this purpose. Although the proposal was sparked first by controversies surrounding custody for cryptoassets and then by significant investment losses, the NPR reaches most assets held in the direct or indirect possession of investment advisers or to which the adviser may gain possession, also redefining qualified custodians to exclude not only most crypto platforms, but also foreign firms and other entities the Commission believes do not ensure sufficient safeguards protecting investor assets in the event of the adviser’s malfeasance, insolvency, or operational failure….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

14 02, 2023

FedFin on: Crypto Set For Senate AML, Reserve Rewrite

Arezou Rafikian2023-02-15T16:13:52-05:00February 14th, 2023|The Vault|

Although Chairman Brown (D-OH) remained non-committal on the need for crypto legislation, he emphatically called for reform to protect consumers and investors. Sen. Warren (D-MA) plans to reintroduce bipartisan legislation extending AML requirements to crypto firms, while Sen. Tillis (R-NC) announced that he is working on a bill addressing proof of reserves and asset segregation. Sen. Lummis (R-WY) was not present, but also plans to reintroduce her sweeping crypto bill (see FSM Report CRYPTO28) in this Congress following revisions that reflect…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

1 02, 2023

FedFin on: State Member Bank Powers

Arezou Rafikian2023-02-01T16:54:12-05:00February 1st, 2023|The Vault|

In conjunction with rejecting an uninsured crypto bank’s application for Federal Reserve membership, the Federal Reserve issued a policy statement conforming state member bank powers only to those authorized for national banks even if the state member is an uninsured depository institution. While it is possible for state member banks to gain greater powers following Fed deliberations, the new approach sharply limits the ability of states to empower uninsured charters not only focused on cryptoasset activities, but….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

17 01, 2023

Karen Petrou: How FHLBs Miss the Mission, Heighten Financial Risk

Arezou Rafikian2023-01-17T17:01:18-05:00January 17th, 2023|The Vault|

Recent revelations about the Federal Home Loan Bank System have made it still more imperative to address whether at least $1 trillion of implicitly-guaranteed federal debt should be authorized to feather the FHLBs’ pockets instead of furthering public welfare. As we detailed in a recent client report, flat-out mission contradictions are clear in the case of a crypto-heavy bank’s use of FHLB funding as a lifeline which it surely obtained because the System can lend with impunity because it has a prior lien ahead of even the FDIC. However, this case isn’t the only current mission conundrum. The other is little-noticed but at least as problematic: the extent to which Home Loan Banks lend not to support homes, but instead to give foreign banks in the U.S. a tidy revenue source via a nifty interest-rate arbitrage play that disadvantages U.S. banks and may even threaten financial stability and monetary-policy transmission.

But first to the question of whether the FHLB System is required to do better. It would seem totally obvious that Home Loan Banks issue debt through the System’s Office of Finance thanks to taxpayer benefits. However, in connection with a discussion of the prior lien, an FHLB spokeswoman said the System operates without any resort to taxpayers. Leaving aside the fact that the Banks don’t pay taxes and couldn’t raise hundreds of billions at near-Treasury spreads if they weren’t cushioned in the taxpayers’ bosom, the law says these entities are agencies of the U.S. Government and regulates …

12 01, 2023

FedFin on: Financial-Policy Consequences of Silvergate’s Travails

Eliza Allen2023-01-12T11:04:34-05:00January 12th, 2023|The Vault|

Karen Petrou’s memo earlier this week and her comments to the American Banker about Silvergate have sparked many client questions. In this report, we provide additional context for aspects of this bank’s condition with policy consequences. High-profile cases such as this have a long history of suddenly shifting long-pending policies; depending on outcomes, this bank’s challenges and those of any other crypto-heavy banks will almost surely do so. In general, the case already confirms U.S. regulators of the wisdom of additional capital for crypto-exposed banks along the lines recently finalized by global regulators (see FSM Report CRYPTO37). However, it also raises significant questions about the role of the Federal Home Loan Banks, brokered deposits, resolution policy, and AOCI recognition – and these are just for starters as the bank struggles to stay afloat.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

9 01, 2023

Karen Petrou: Is Silvergate Solvent?

Arezou Rafikian2023-01-09T16:42:49-05:00January 9th, 2023|The Vault|

Is Silvergate solvent? Media coverage suggests it can stay in business based on the crypto bank’s liquidity. Liquidity is, though, only a necessary condition for a bank to survive. For it actually to remain in business, a bank must also be solvent. For Silvergate and several other crypto-heavy banks this won’t be easy.

The critical criterion determining whether regulators allow a bank to remain in business is the extent to which its capital meets or exceeds the rules and, when it doesn’t, how much below these thresholds it falls and why. Ever since 1991, regulators are supposed to grant banks little leeway on these capital requirements – “prompt corrective action” provisions demand that regulators sanction banks as capital plummets and close them if they haven’t already done so if ratio’s sink to the “critical-capital” threshold.

Faced with a Lehman-like run, Silvergate has understandably focused on assuring stakeholders that it can continue to sell assets to handle all withdrawals. And so it may, but that’s not its only problem. Even if it’s liquid, Silvergate faces a grim future if its regulatory-capital ratios falter – and they might.

To survive, Silvergate must run a gauntlet between the amount of capital it holds on a shrinking pool of assets and the capital costs of losses taken as assets are sold to handle withdrawals. The bank entered the liquidity wringer with ample capital. According to its third-quarter call report, its leverage ratio was over ten percent. And, even when the bank dumped over …

4 01, 2023

FedFin on: Bank Crypto Safety-and-Soundness Standards

Arezou Rafikian2023-01-06T10:38:42-05:00January 4th, 2023|The Vault|

The Basel Committee has finalized its second try at global standards governing bank cryptoasset exposures,1 laying out a path that U.S. agencies plan quickly to implement even as Congress continues to wrestle with this fast-changing sector. In general, the final Basel approach allows banks both to undertake cryptoasset activities and hold exposures in this sector. However, the conditions applied to all but the most straightforward digital assets issued by regulated entities and to all stablecoins are extensive and costly…..

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

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19 12, 2022

FedFin on: FSOC Targets Usual Suspects but Also Points to Big-BHC, Nonbank Mortgage Systemic Risk

Arezou Rafikian2023-01-03T15:56:33-05:00December 19th, 2022|The Vault|

As promised, this FedFin report provides an in-depth analysis of FSOC’s 2022 annual report, focusing on findings with near-term policy implications. As always, the report is lengthy and includes many observations and market details that provide insight into Treasury and member-agency-staff thought. Much in it reiterates concerns about short-term funding markets, CCPs, and….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

12 12, 2022

Karen Petrou: Where New Crypto Enforcement, Regulatory Action Will Land

Arezou Rafikian2022-12-12T15:50:07-05:00December 12th, 2022|The Vault|

As we’ve learned over the years, a memo written is a memo shared. So it was with my last note on what were then little-noticed links between the tumultuous cryptosphere and what regulators assured us was a banking sector aloof from these violent downdrafts. Sens. Warren and Smith then picked up the examples of several bank/crypto hot spots. The result of new facts combined with heightened political risk will surely lead the bank regulators to follow the tried-and-true strategy of slapping a lot of enforcement actions around before agency heads are hauled up to the Hill. Other than stablecoin legislation, new crypto law is uncertain, but after all the enforcement actions will also surely come new banking crypto regulation.

First, though, to incoming enforcement actions as these lay the groundwork for next-gen regulation. Any bank with big crypto exposures no matter how otherwise pristine is already under its examiner’s gun in terms of immediate demands for an inventory of all crypto actions anytime for anyone. The senators include this in their asks, looking for names as well as activities and customers. But the banking agencies were surely already hot on this trail.

Any bank that failed to mind its prior-notice manners will surely get a public drubbing so that regulators can point to a host of cases that uncover all risks anywhere they lurk. And banks now casting covetous eyes on cheap crypto assets will get a talking to from Washington if their own internal risk managers haven’t already …

5 12, 2022

Karen Petrou: Bank Canaries in the Crypto Mineshaft

Arezou Rafikian2022-12-05T16:34:33-05:00December 5th, 2022|The Vault|

Just because crypto hasn’t triggered a systemic collapse doesn’t mean that it won’t be the perpetrator of quiet banking crashes. We would do well to remember that the 2008 calamity came shortly after the collapse of small subprime-mortgage finance companies. These would have been proverbial dead canaries had anyone looked down the mineshaft. And, even as the U.S. subprime crashes formed into a single, torrential crisis, bank regulators confidently foretold no systemic impact because they comfortably believed that no bank had undue exposure to high-risk mortgages. So bank regulators still say now when it comes to crypto and let’s hope the outcome is different this time. However, bits and pieces of bank wreckage are already to be found in FTX’s rubble and may well surface as the crypto tide continues to ebb. No bank shipwrecks have emerged, but some of the wreckage has the look of a sizeable hull.

The most tantalizing bit of banking wreckage is a super-tiny Washington State bank which FTX appears to have surreptitiously acquired. As the New York Times reported, one of FTX’s affiliates last March invested more than double all the capital previously held in Farmington State Bank, doing so in a carefully-structured way to avoid triggering legal control thresholds. The bank is the nation’s 26^th smallest and, after this generous investment, it deposits went up about 600 percent from its initial $10 million level via four new accounts. Sill more intriguingly, Farmington’s crypto ties via shadow owners appear to go back to …