The White House announced on Thursday that it will work to overturn regional bank deregulation. According to a White House fact sheet, the Biden administration is asking the Federal Reserve and other autonomous agencies to tighten regulations. This is targeted at reducing banks’ dependence on debt and strengthening their cash on hand. These standards, which were set in place following the 2008 financial crisis, were relaxed for medium-sized banks per the 2018 law.
Such drastic steps are been taken after the collapse of the Silicon Valley Bank. Banks will be required to keep more cash assets on hand while subjecting themselves to more regular stress tests. According to a White House official, all of the moves they’re pointing to can be done under current legislation.
SVB was keeping $227 million in funds for bitcoin lender BlockFi, which filed bankruptcy in November after FTX failed. The failure of SVB highlighted the hazards of consolidation in the financial system by exposing multiple digital currency businesses to the insolvency of a single organisation. It also prompted worries about the sort of money reserves that stablecoins keep.
The failure of SVB additionally caused concerns about the general stability of the banking system. Given that the bank’s breakdown happened during a period of rising inflation, several experts were cautious about the possibility of other bank failures, particularly among smaller lenders. The collapse of Silicon Valley Bank stunned the IT and cryptocurrency industries, with many companies revealing their stake to the bank.
The cryptocurrency and banking industries are inextricably linked, with several crypto exchanges relying on banks to store money and handle transactions. Banking regulation changes may affect the cryptocurrency industry, which has been pursuing increased legitimacy and integration with conventional financial systems. This implies that the regulatory framework for banks, and thus the crypto sector, may shift more quickly than if a new law is needed.
On Thursday, the White House revealed the changes, which can be enacted by existing financial regulators such as the Federal Reserve. The specifics of that legislation were largely left to regulators, primarily the Fed, to execute, giving banks with assets of $100 billion to $250 billion significant leeway to tighten regulations. However, because the financial agencies — the Fed, the FDIC, and the Office of the Comptroller of the Currency — are designed to operate independently of the president, the government can only exert political pressure.
Meanwhile, the crypto business may profit tangentially from the US government’s tightening of banking regulations in a few ways. As cryptocurrencies gain fame and adoption, increased governmental oversight may help boost their legitimacy in the views of conventional investors and organisations. A more regulated financial system could also assist the cryptocurrency industry’s overall image.
Tighter banking rules could result in a more secure financial system as a whole. This could boost investor trust in the wider financial markets, including cryptocurrencies, which are frequently regarded as speculative assets. Tighter banking regulations may result in improved anti-money laundering (AML) and know-your-customer (KYC) practices. This could help decrease fraud and criminal activity in the cryptocurrency business while also increasing investor and customer confidence.
In 2019, the Fed used its authority to tailor these regulations, which garnered criticism from officials, including current Federal Deposit Insurance Corporation Chair Martin Gruenberg. The central bank’s move to exempt institutions with assets between $100 and $250 billion from keeping a standardised “liquidity coverage ratio” has sparked debate.
Vice Chair of the Federal Reserve for Supervision Michael Barr, who was nominated by Biden and approved last July, is investigating what went wrong in the Federal Reserve’s oversight of SVB, with a report due by May 1. The aim is to safeguard depositors and the financial system by preventing repeat disasters. Then they will recommend regulatory and supervisory actions to prevent such drastic banking failures.
