Basel Committee Reports on Crypto's Role in the Banking Crisis and Introduces Disclosure Framework

The Basel Committee on Banking Supervision attributed a portion of this year's banking crisis to the crypto sector in a report released on Thursday, writes BankingDive. Additionally, it revealed an upcoming framework for banks involved with cryptocurrency.

The Basel Committee on Banking Supervision unveiled a plan on Thursday requiring banks to disclose their exposure to cryptocurrency to the public. They announced that a consultation paper outlining "a set of disclosure requirements regarding banks' cryptoasset exposures" would be released in the near future.

These proposals will complement the prudential standard for crypto exposures, which was published in December 2022.

In a separate report also issued on Thursday, the committee placed some responsibility for this year's regional banking crisis, which was described as "the most significant system-wide banking stress since the Great Financial Crisis in terms of scale and scope," on the exposure of crypto banks to the then-volatile crypto market.

Crypto was identified as one of three structural trends that "might have indirectly contributed to some of the vulnerabilities" in the sector earlier this year, alongside the growth of non-bank financial intermediation and the continued digitization of finance.

The committee noted, "The market valuation of cryptoassets increased from approximately $16 billion six years ago to nearly $3 trillion in 2021 before decreasing to slightly over $1 trillion at the beginning of March 2023." They also pointed out that direct exposures of the global banking system to cryptoassets were limited, accounting for just under €4 billion, or 0.004% of total exposures as of the end of June 2022, and were concentrated in a small number of banks.

One of the early casualties in the banking sector in 2023 was Signature Bank. The committee mentioned that Signature Bank "failed to comprehend the risks associated with its ties to and reliance on cryptocurrency industry deposits, as well as its vulnerability to contagion from the turmoil in the cryptocurrency industry that occurred in late 2022 and into 2023." They also noted that the management did not acknowledge that their exposure to the crypto industry might lead other customers to withdraw or reduce their own deposits while the crypto market experienced turbulence.

A month after the closure of Signature Bank, the Federal Deposit Insurance Corp. squarely blamed poor management. Regulators had differing opinions on the cause, with Securities and Exchange Commission Chair Gary Gensler attributing bank failures, including Signature's, to their connections with the crypto sector. Meanwhile, New York State Department of Financial Services Superintendent Adrienne Harris attributed Signature's failure to depositor outflows.