The crypto industry and the banking sector are closely correlated, with many crypto exchanges using banks to hold funds and process transactions.
Changes in banking regulations can impact the crypto industry, which has been seeking greater legitimacy and integration with traditional financial systems.
United States President Joe Biden is stepping up pressure on federal banking regulators to tighten rules for regional banks and require institutions with the same size as Silicon Valley Bank to maintain a greater amount of liquid assets while undergoing more frequent stress tests.
The California Department of Financial Protection and Innovation ordered the closure of Silicon Valley Bank this month, which was headquartered in Santa Clara, California.
Silicon Valley Bank lost $42 billion in one day due to many depositors withdrawing funds using online platforms.
Biden To Fed: Tighten Bank Rules
The goal of tightening rules for regional banks is to enhance the stability of the financial system and to mitigate risks of bank failures.
Banks would be required to maintain a higher level of easily accessible assets that can be quickly converted to cash in times of financial stress, thereby safeguarding their customers’ deposits and preventing market-wide disruptions.
The White House announced the changes on Thursday, which can be implemented by current bank regulators, including the Federal Reserve, without the need for new legislation.
The implication of this action is that the banking regulations can be amended swiftly without the necessity of introducing new laws, indicating a potential impact on the crypto industry.
This means that the regulatory environment for banks, and indirectly for the crypto industry, could change more rapidly than if new legislation was required.
A White House fact sheet reveals that the Biden administration is encouraging the Federal Reserve and other independent organizations to strengthen regulations aimed at reducing banks’ dependence on debt and increasing their liquidity.
In 2018, the Trump administration loosened oversight of regional banks through a bipartisan bill, changing the definition of “systemically important” banks to those with at least $250 billion in assets, reversing the strict requirements put in place by Congress following the 2008 financial crisis.
A Republican lawmaker criticized the US central bank for not holding lenders like Silicon Valley Bank accountable when they have the power to do so.
Patrick McHenry, chair of the House Financial Services Committee, suggests holding regulators responsible for their inability to use their supervisory tools during bank failures instead of granting them more authority.
Michael Barr, the head of bank regulation at the Fed, expressed the need for stronger capital and liquidity requirements.
The Fed’s Authority In Tweaking Rules
In 2019, the Fed used its power to customize these rules, which drew objections from officials, including Martin Gruenberg, the current Federal Deposit Insurance Corporation Chair.
The central bank’s decision to exempt lenders with assets of $100-$250 billion from maintaining a standardized “liquidity coverage ratio” has drawn attention.
The ratio measures whether a lender has enough high-quality liquid assets to survive a crisis. SVB’s lack of liquidity was a significant issue as deposits left the bank, and the value of its assets decreased, causing its failure.
The Biden administration is pushing for stricter banking regulations for regional banks, particularly those of similar asset sizes to SVB, in response to its failure and the potential risks posed by these banks.
The goal is to prevent future failures and provide greater protection to depositors and the financial system.
Crypto Can Benefit From Stringent Banking Rules
Meanwhile, the crypto industry could indirectly benefit from the US government tightening its rules on the banking sector in a few ways.
Tighter banking regulations may lead to a more stable financial system overall. This could help increase investor confidence in the broader financial markets, including cryptocurrencies, which are often viewed as a speculative asset class.
As cryptocurrencies continue to grow in popularity and adoption, greater regulatory oversight could help increase their legitimacy in the eyes of traditional investors and institutions. A more regulated banking system could also help improve the reputation of the cryptocurrency industry as a whole.
Tighter banking rules could lead to stronger anti-money laundering (AML) and know-your-customer (KYC) practices. This could help reduce fraud and criminal activities in the crypto industry and increase trust among investors and consumers.
-Featured image from Finance Magnates