Mar 16, 2023

Signature Bank is on the market after being shuttered by state regulators on Sunday, but any potential buyer reportedly has to agree to a major caveat: no crypto.

Video transcript

State of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Us House Majority Whip Tom Emmer sending a letter to FDIC C Chair Martin Grunberg Wednesday asking about quote reports that the FDIC is weaponizing recent instability in the banking sector to purge legal crypto from the United States. Joining us now is former US regulator at the FDIC Jason Brett, who's currently managing director of key bridge advisors, Jason, thank you for joining us this morning. So Congressman Emmer alleges federal financial regulators have singled out and shut down crypto friendly banks, namely Silver Gate, Silicon Valley Bank and signature banks to send a message to get people away from crypto. What are your thoughts? Well, I always appreciate uh Congressman emmer um enthusiasm about the crypto industry and I think it's a justified letter uh to question, I would say the amount of focus that we have seen by the regulators on crypto, which I think has been a bit of an inordinate focus for such a small sector of the whole banking economy. Now as to why you saw Silicon Valley Bank signature bank and and of course, um uh the failures you know where Silver Gate wo wound down um relates a lot to what was just said about the interest rate risk, you know, you had and, and to hear us talking about risk management makes me feel kind of crazy because as a former ex regulator, one of the things you do is this thing called a Camel's rating and the s is the sensitivity to interest rate risk. So it isn't just the banks that are supposed to be managing this interest rate risk. It's the regulators that are supposed to be watching them and what is supposed to be the most regulated part of this industry. So I wouldn't go so far as to say all of the banks have been shut down because of crypto. It's very possible that um, what when Silver Gate wound down, they ended up looking at Silicon Valley Bank and because of the activity of all fintech including crypto, they end up having to shut it down. But then you have signature bank which had record earnings and had already been winding down some of its crypto activities. So I think you might have seen them start to try to put this fire out, but it's caught on and I think there is some questions to the regulators about how much attention they paid. We're not in a crypto crisis. This is not a financial crisis yet, but this is a banking crisis. This is a crisis of how the banks are, are managing their books. So we asked former acting control of the currency Brooks the other day, whether he thinks there was a coordinated effort to shut down crypto friendly banks. What people are calling operation choke 0.2 0.0. We have a clip. Let's have a quick listen. I think it's pretty clear there has been a decision across the bank regulatory agencies in this administration that crypto is inherently risky. It needs to be extricated from the banking system. The way the bank regulators work is that they are highly coordinated. I mean, when I was running the OCC, I had a weekly call with the FDIC chairman and with the vice chairman of the fed for his bank supervision. We talked every week for an hour and talked about what our priorities were for the coming week, how we can support each other, how our actions would affect the system. So these things are not accidents at all. I I'm highly confident of that. So do you agree with this narrative that federal financial regulators in this administration are coordinating to choke out crypto companies from accessing the US banking system as a sort of scapegoat of sorts? Um I think so. I, I I'd have to agree with that. Um And, and this administration has been very coordinated in a couple of areas before that. I think lends truth to what uh Brian Brooks is saying. Um you saw how the former chair of the FDIC Helena mcwilliams who was a big fan of crypto and pushing that at the FDIC was basically ousted um in what was almost a coup d'etat where you saw the another agency, the Consumer Financial Protection Bureau basically move in and take over the FDIC S agenda. And now you see uh chairman Gruenberg there at the top of the FDIC and he's not been a fan of fintech, much less crypto if you look at, um when uh Jack Dorsey tried to get his industrial loan bank charter, Brian Brooks took a vote with Gruenberg on the same FDA C board. Gloomberg voted against them getting uh square getting its industrial loan charter. Um, but Brooks was in favor of it. So it's about the friendliness toward crypto and there's, it just does not exist and, um you know, this isn't um uh uh some, yeah, sorry. Was this II I, you know, was this sort of taking advantage of an opportunity that was given to them by the, by the banking industry or do you think that there was, uh it was preplanned? And, and number two is uh, yeah. Well, I'll let you get to that and then I, I do have a follow up with that. Sure. Thanks to the question. I think it in a way it was pre planned. I think it's pretty clear the Federal Reserve Treasury and the White House all started coming up with a plan at the beginning of last year as to what to do about crypto. And from my understanding, the Biden administration had three main concerns to make sure the government could set monetary policy to make sure they could regulate financial markets for safety and soundness, consumer protection, and also protect against illicit finance. And those were non-negotiable terms. So when the executive order came out uh on digital assets in March, that became the vehicle for the administration working toward what they announced in October or excuse me, September of last year, which is a regulatory framework for the US on crypto. And if you note it was about a month ago, the White House put out an update on this and they specifically said in their memo, you know, in the light of day, crypto should not be in the banking system. So I don't even think it's something they're necessarily hiding. Maybe they don't like the word choke point, but they've made it very clear, they don't want crypto in the banking system with the easier way and less disruptive way than to would have been to let's say, knock out uh signature and uh silver gates uh uh uh lines that CNET and send the, the, the instant payment systems that the 24 7 systems that they had in place that helped uh these crypto crypto companies, the crypto exchanges do their banking on a 24 7 basis. If they had knocked out those two networks, uh would it wouldn't that have been less disruptive than syncing those two banks? Uh Absolutely. And, and that clearly could have been handled by the regulators ahead of time. Um, regulators always work with banks and what they consider any line of business right now. Some of the questions about people who have been trying to work with banks has been, can you offer something as simple as crypto custody? That's a, is it a legally permissible banking activity? So if they were to say those, those networks that you just described were not really legally permissible or are not based on safe and sound financial concepts, then certainly the regulators could have stopped that. But I think what you saw happen was this got messier than they ever expected because I think ultimately as Silicon Valley Bank was shutting down over the weekend, whether or not it started about crypto, it became about the banking system and having people feel safe. And there were people I know who have been asking me questions on Monday as to should they take their money out of the banking system? So this got much broader for from crypto very quick. So in hindsight, I think you're right, they very much would have preferred to just try to knock out the network. So they felt like that was the key without having what they now have on their hands. Which global financial crisis, a point that signature bank is on the market after being shuttered by state regulators on Sunday. Even though Barney Frank who sits on the board said, you know, they were solvent ready to open on Monday, their financials were ok open for withdrawals but any potential buyer now reportedly has to agree to a major caveat. No crypto uh when dealing with the operations of the bank according to Reuters report. But as you were mentioning that this has spilled over to the broader banking sector, credit suisse. Nothing to do with crypto. What what what is going on there? How do you tie this uh blue sense together? So uh the credit suisse example as was mentioned before has been in trouble for some time. But I think what you're seeing are really sharks in the water and a lot of short selling of bank stocks, which is actually going to be very interesting for those in crypto because it might put sec chair, Gary Gensler on the center stage very soon. Back in 2008 during the financial crisis, it was the role of the SEC to stop short selling of all financial stocks. And so I think what you're seeing is a lot of people move out of bank stocks right now into safer parts of the ecosystem. But you're also seeing the banks themselves, particularly at credit suisse level. I think of also trying to get ahead of this news cycle about how bad things are credit suisse. They're trying to signal confidence by saying they're taking that 50 you know, $3 billion from the regulator and the regulator wants to do that. It's a similar move you're seeing to events that happened in the US, which shows that this is, I think a crisis within banking, within perhaps how the balance sheet has been managed, people buying long term treasuries, which is kind of ironic for crypto, right? Because we're always told we're the ones way out on the ledge. You know, how are banks simply buying treasuries causing this risk? And again, this is something whether you're in the United States or in Swiss, if you're a regulator, you interest rate risk is one of the most basic things you have to manage with your bank because this is very often what will happen when you kind of a low interest rate environment. It's not the first time in history we've seen. Well, you stated that you've worked on cases similar to this in a recent podcast back in 2008, claiming the GFC was a bank run on in Mac an institution that failed due to a lack of confidence among its deposits. Can you elaborate on the similarities and differences between the bank failings today and the mortgage uh back cases in 2008? Sure. So yeah, I helped when in bank became a federal bank um run by the FDIC as a junior analyst assisting with understanding the deposit flows back then and it is very similar because we've now seen basically nationalized Silicon Valley Bank and Signature Bank in the same way. And they're to sell the banks very quickly back to the private sector in 2008. What really happened with in Mac was uh uh essentially a youtube financial crisis. You had a lot of the um older folks like in their seventies and eighties running on the bank. But then you had these people who were in their 20 who were filming youtube videos outside the bank. And before you knew it, we saw that the, the demographics were changing where people in their twenties, thirties and forties who hadn't necessarily lived through the Great Depression were suddenly running and there were these huge lines outside Indymac Bank and it was a real shock to the system. And I mean, uh Gloomberg was the vice chair during this time. So as chair, he probably saw this and Indie Mac Bank was a real disaster because you just had people lined out the streets for days. It was hot in California. What you have now though is maybe people are inside their homes on their phones, but they're all watching Twitter. And this is something that we thought about in 2008. And I still think about today is what happens when the velocity of information is so fast. There is any in time for the regulator to try to either talk to the public or talk to the bank or get anything coordinated. I mean, this was in a matter of 48 hours and also with signature bank on a Sunday being closed. I mean, I don't think most Americans spend their time banking on Sunday and unless we can see that signature had a lot of people running out of the door from it over that Sunday that changes a lot of things because then we're not able to get to the golf course at three o'clock anymore. It's no more. 363, it's 24 7. Yeah. Well, I guess that's what happens when you have this financial transformation in cryptocurrencies, especially that you see that it moves at such a rapid pace even more so than what you see in the traditional banking system, which is catching up. Jason. Thank you so much for joining us. That was Jason Brett, managing director of Key Bridge advisor and former US regulator at the FDIC.

Learn more about Consensus 2024, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to to register and buy your pass now.