US Banking System Faces Crypto-Asset Risks, FDIC Warns in 2023 Review

The Federal Deposit Insurance Corporation (FDIC) has highlighted potential risks associated with crypto-assets to the U.S. financial framework. This insight emerged from the FDIC’s 2023 Risk Review, which, for the first time, included a segment on bitcoin. The report characterized the challenges posed by digital assets as both novel and intricate.

The FDIC’s Risk Review, which was published on August 14, 2023, placed a strong emphasis on the growing interest of banks in operations involving cryptocurrencies. The following is an excerpt from the report: “The FDIC has been generally aware of the rising interest in crypto-asset-related activities through its normal supervision process.” The significant market fluctuations in 2022 underscored the importance of understanding the risks tied to cryptocurrencies more deeply.

The Federal Deposit Insurance Corporation (FDIC) has voiced several primary apprehensions regarding the crypto sector. These include potential fraudulent activities, the threat of widespread impact, and concentration risks due to the interconnected nature of crypto businesses. The ever-evolving and fast-paced nature of cryptocurrencies further complicates the risk evaluation process.

The “run-risk” that is connected with stablecoins is one more key issue that the FDIC is concerned about. The supervisory agency issues a warning that banks that hold stablecoins may be vulnerable to the loss of customer deposits, which may constitute a risk to the integrity of the financial system.

Following the FDIC’s alert, the banking world experienced turmoil in March when three prominent banks – Silicon Valley Bank, Silvergate Bank, and Signature Bank – encountered significant hurdles. Importantly, these institutions were recognized for their services to the U.S. crypto sector. The shutdown of Silicon Valley Bank triggered a frenzied sell-off when Circle, the issuer of USD Coin (USDC), announced its incapability to access $3.3 billion in reserves from the bank.

To counteract the upheaval, the FDIC collaborated with other U.S. regulatory bodies to assist the impacted banks and oversee the transfer of their assets to alternate financial entities.

Drawing from the FDIC’s 2023 Risk Review and recent observations, it’s evident that as the crypto realm expands and evolves, it introduces complexities that both regulators and the banking sector must proactively navigate.

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Kansas Heartland Tri-State Bank Closure Indicates Continued U.S. Banking Crisis

On July 28, 2023, the Kansas Office of the State Bank Commissioner closed Heartland Tri-State Bank of Elkhart, Kansas, appointing the Federal Deposit Insurance Corporation (FDIC) as receiver.

This closure marks another chapter in the ongoing banking crisis in the United States, following the recent failures of First Republic, Silicon Valley Bank, and Signature Bank.

As of March 31, 2023, Heartland Tri-State Bank had approximately $139 million in total assets and $130 million in total deposits. Dream First Bank, National Association, of Syracuse, Kansas, has agreed to assume all deposits and purchase essentially all assets of the failed bank.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $54.2 million, making the acquisition by Dream First Bank the least costly resolution for the DIF.

The four branches of Heartland Tri-State Bank will reopen as branches of Dream First Bank on July 31, 2023, under normal business hours. Customers can continue to access their money and make loan payments as usual.

The first half of 2023 has witnessed several bank closure events that have sent shockwaves through the financial industry.

The banking crisis continues to unfold, marked by significant bank collapses. The collapse of Silicon Valley Bank in March 2023 triggered days of chaos in the U.S. banking system.

First Republic Bank, the nation’s second-largest bank failure ever, was acquired by JPMorgan in May 2023 after rescue efforts failed. Signature Bank’s failure further added to the turmoil, shaking up the banking industry.

A few factors contribute to the ongoing banking crisis. Rising U.S. interest rates are believed to be a contributing factor. The U.S. Federal Reserve increasing its benchmark rate to 5.25% in July 2023 (the highest rate since 2007). Alongside this, systemic issues within the banking sector, compounded by inadequate risk management, have been brought to light.

These revelations have spurred lawmakers to take action, introducing new legislation aimed at safeguarding customer deposits and stabilizing the financial system.

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FDIC Investigates Potential Violations of Federal Deposit Insurance Act by OKCoin USA Inc.

The Federal Deposit Insurance Corporation (FDIC) has initiated an investigation into OKCoin USA Inc. (OKCoin) and its senior executives for alleged false and misleading statements regarding the company’s insured status. According to the FDIC’s legal division, OKCoin may have violated Section 18(a)(4) of the Federal Deposit Insurance Act (FDI Act) and its implementing regulation, 12 C.F.R. Part 328, Subpart B.

The FDI Act and Part 328 prohibit individuals or entities from misrepresenting the insured status of deposits or knowingly providing false information about the extent and manner of deposit insurance. The FDIC has the authority to enforce these provisions, including issuing cease-and-desist orders and imposing civil money penalties.

The FDIC’s investigation focuses on statements made by OKCoin on its website and social media platforms. The company’s claims that it is “Licensed across the US with FDIC insurance on OKCoin accounts” and that it provides “FDIC insurance for all USD deposits” are under scrutiny. Additionally, OKCoin’s Chief Marketing Officer made a social media post on Twitter stating, “If you are in the US we offer FDIC insurance on USD deposits.”

These statements allegedly imply that OKCoin itself is FDIC-insured, that all customer funds, including crypto assets, are covered by FDIC insurance, and that the FDIC endorses a specific blockchain. However, the FDIC clarifies that OKCoin is not FDIC-insured and that the FDIC does not insure non-deposit products or endorse particular blockchains.

The FDIC has demanded corrective action from OKCoin, which includes the immediate removal of all statements that suggest FDIC insurance coverage in any form other than specified by the FDI Act. OKCoin is also required to cease making any false or misleading statements about its insured status while providing clear information about the insured depository institution (IDI) with which it has a relationship for deposit placement.

OKCoin has been given fifteen business days to respond to the FDIC’s demands and provide written confirmation of compliance. Failure to respond or address the concerns raised may result in further actions being taken by the FDIC in accordance with the FDI Act.

The FDIC’s investigation is limited to potential violations of Section 18(a)(4) and Part 328 of the FDI Act. The outcome of this matter may not affect the FDIC’s assessment of other violations, nor does it prevent other federal or state agencies from pursuing actions related to potential violations of other laws and regulations.


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Consumer Caution: Payment Apps and the Risk of Uninsured Deposits

In the evolving landscape of financial services, nonbank payment app companies are revealing significant gaps in deposit insurance coverage compared to traditional bank and credit union accounts. These companies, often regulated as money services businesses (MSBs), are required to register with the U.S. Department of Treasury but are not subject to the same federal oversight as their traditional counterparts. Consequently, consumer deposits in these apps might lack crucial protections.

Payment apps have emerged as convenient alternatives to traditional banks, offering services such as payment transfers and stored value services that resemble deposit accounts. However, critical differences emerge when scrutinizing deposit insurance coverage. Traditional banks and credit unions provide depositors with Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance, which safeguards deposits up to $250,000 in the event of institutional failure. On the other hand, deposit insurance for payment apps only applies if funds are deposited at an FDIC-insured bank or an NCUA-insured credit union.

Moreover, some payment apps, which often invest user funds and do not pay interest on balances, may lack transparency about where consumer funds are held and whether they are insured. Additionally, they might impose pre-conditions for deposit insurance, which can be difficult to verify. Importantly, deposit insurance does not protect against the failure of the nonbank company itself.

Furthermore, these companies might invest customer funds in risky non-deposit products, posing a risk of insolvency if investment values decline or if customers demand their funds all at once. In such cases, consumers may face significant delays in accessing their funds during bankruptcy proceedings.

Regulatory bodies, including the Consumer Financial Protection Bureau (CFPB) and the FDIC, have raised concerns about potential consumer confusion, leading to advisories against deceptive representations involving FDIC’s name, logo, or deposit insurance. The FDIC also proposed an update to rules regarding signage to clearly indicate where uninsured products are offered.

Consumers are advised to be aware of these risks when maintaining balances in nonbank payment apps. To minimize these risks, transferring balances back to federally insured accounts is recommended. Regulatory bodies will continue to monitor this growing segment of the payments ecosystem and consider further protective measures.


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Public Worry Grows Over Bank Stability

In a recent Gallup poll conducted across the United States in April, 48% of respondents expressed concern about their money in the bank, with almost 20% indicating they were “very concerned.” The poll was conducted after the collapse of Silicon Valley Bank and Signature Bank but before the failure of First Republic Bank in late April. According to Gallup, this level of worry is on par with the last bank-induced financial crisis in 2008, when financial institutions previously believed to be “too big to fail” collapsed.

Experts at the Hoover Institution think tank suggest that if half of all uninsured savers withdrew their cash, 186 American banks would be at risk of impairment. These banks have total assets of $300 billion but represent less than 5% of the estimated 4,135 FDIC (Federal Deposit Insurance Corporation) insured commercial banks in the United States.

Additionally, California-based PacWest, Arizona’s Western Alliance, and Memphis-based First Horizon reportedly hang in the balance following a share price slump last week. A more concerning report from the UK’s Telegraph earlier this month suggested that half of the banks in America could be insolvent. The report cited research published in April by Stanford University banking expert Amit Seru, who estimated that more than 2,315 U.S. banks are currently sitting on assets worth less than their liabilities.

“The U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity,” Seru said. This gap is due to the banks’ underestimation of the risk of loan defaults and represents a significant threat to the stability of the banking system.

The current public opinion of banks appears to be dwindling as the industry struggles to contain the collapse of several high-profile financial institutions in recent months. While these concerns are not yet at crisis levels, they do suggest a lack of confidence in the banking system. It remains to be seen what steps regulators will take to address these issues and restore public faith in the stability of financial institutions.


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JPMorgan to Acquire First Republic Bank Assets

JPMorgan Chase is poised to acquire the assets of First Republic Bank (FRB), after regulators closed the bank on May 1. JPMorgan and several other banks had submitted bids to acquire the troubled bank’s assets after early efforts to rescue it failed.

As part of the purchase and assumption agreement with the FDIC, JPMorgan will take on all of FRB’s assets, including uninsured deposits. With $229.1 billion in assets and $103.9 billion in deposits, FRB was a significant acquisition for JPMorgan.

In addition to acquiring the bank’s assets, JPMorgan also entered into a loss-sharing agreement with the FDIC for residential and commercial loans acquired by FRB. Under the agreement, any losses and recoveries on the loans covered by the loss-share agreement will be shared between the FDIC and JPMorgan.

All depositors of FRB will become part of JPMorgan and will have access to their total deposits insured by the FDIC. The 84 locations of FRB in eight states will reopen as JPMorgan Chase, allowing customers to continue banking services at the current branch until they receive any change notification from JPMorgan.

The trouble began for FRB on April 26 when news of a government receivership surfaced. The bank’s shares dropped 20% in just a few hours following the announcement. The days following the announcement were even more volatile for the bank before regulators eventually closed the bank.

With FRB’s closure, it becomes the latest US bank to collapse in 2023, joining Silicon Valley Bank and Signature Bank.

This acquisition is a significant move for JPMorgan, as it expands its reach and strengthens its presence in the banking industry. JPMorgan has a history of making large-scale acquisitions, and this acquisition of FRB’s assets follows a pattern of growth through strategic acquisitions.

First Republic Bank had a reputation as a premier private bank for high-net-worth individuals and businesses. However, the bank had been struggling for some time due to a high level of non-performing loans and other financial difficulties. Despite efforts to rescue the bank, regulators determined that the best course of action was to close it and transfer its assets to another institution.

The loss-sharing agreement between JPMorgan and the FDIC is designed to mitigate any potential losses and ensure that depositors are protected. This agreement is a standard part of any acquisition involving a failed bank, and it ensures that the FDIC is able to recover as much of its costs as possible.

Overall, JPMorgan’s acquisition of First Republic Bank’s assets is a significant development in the banking industry. As JPMorgan continues to grow and expand its reach, this acquisition demonstrates its commitment to providing excellent banking services and support to customers across the United States.


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Signature Bank Collapse Blamed on Poor Management

Signature Bank’s Collapse Blamed on Poor Management and Inadequate Risk Management Practices

Signature Bank, a New York-based bank that catered to corporate and high-net-worth clients, collapsed on March 12, 2023. In the wake of the bank’s collapse, the United States Federal Deposit Insurance Corporation (FDIC) conducted a post-mortem assessment to determine the cause of the bank’s failure. The FDIC’s assessment revealed that poor management and inadequate risk management practices were the root causes of Signature Bank’s collapse.

According to the FDIC, Signature Bank’s senior management failed to adequately monitor and control the bank’s risk exposures, which ultimately led to the bank’s downfall. The FDIC also noted that the bank’s board of directors did not provide effective oversight of management’s actions, further contributing to the bank’s collapse.

The FDIC’s assessment of Signature Bank’s risk management practices revealed several shortcomings. For example, the bank did not have adequate controls in place to manage its credit risk exposures. Additionally, the bank’s risk management systems and processes were not integrated, making it difficult to obtain a comprehensive view of the bank’s risk exposures.

In addition to the bank’s poor risk management practices, the FDIC’s assessment also identified deficiencies in Signature Bank’s operations and internal controls. For example, the bank did not have adequate procedures in place for verifying customer identities and detecting potential money laundering activities.

The FDIC’s assessment of Signature Bank’s collapse underscores the importance of effective risk management practices in the banking industry. Banks must have robust risk management systems and processes in place to identify, measure, monitor, and control their risk exposures. Additionally, senior management and board members must be actively engaged in overseeing the bank’s risk management activities.

In response to Signature Bank’s collapse, the FDIC has taken steps to strengthen its oversight of the banking industry. The FDIC has increased its examination frequency for banks that pose a higher risk to the insurance fund. Additionally, the FDIC has enhanced its risk management guidance for banks to promote better risk management practices.

In conclusion, the collapse of Signature Bank serves as a cautionary tale for the banking industry. Banks must prioritize effective risk management practices to prevent similar failures in the future. Furthermore, regulators and industry participants must work together to promote a strong and resilient banking system that can withstand economic shocks and protect the interests of depositors and the broader economy.


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JP Morgan Executive Warns of Banking Collapse

In a recent interview with Bloomberg Television, Bob Michele, the chief investment officer of JP Morgan Asset Management, expressed concern over the future of regional banks in the United States. Michele was particularly worried about how these banks will operate once the Federal Deposit Insurance Corporation (FDIC) and Federal Home Loan Banks (FHLB) emergency lending programs expire.

Michele’s concerns stem from the recent liquidity issues faced by First Republic Bank, which has experienced significant deposit outflows. According to Michele, the impact of these liquidity issues is not limited to First Republic Bank alone but could potentially affect the entire banking industry in the United States.

While the FDIC and FHLB programs were created to help regional banks during times of crisis, their expiration could have devastating consequences for these institutions. Michele warned that the possible collapse of First Republic Bank could cause a domino effect that could lead to the collapse of other regional banks.

Michele’s comments highlight the importance of emergency lending programs for regional banks in the United States. These programs help provide liquidity to banks during times of financial stress, ensuring that they can continue to operate and meet the needs of their customers.

However, Michele’s comments also reveal a deeper concern about the stability of the banking industry as a whole. With the recent rise of fintech companies and the growing popularity of digital banking, traditional banks are facing increasing competition. In this context, the potential collapse of regional banks could have serious consequences for the entire financial system.

To address these concerns, it is crucial for policymakers to take a proactive approach to ensure the stability of the banking industry. This could involve extending emergency lending programs or creating new programs to provide support to regional banks. It could also involve implementing regulatory measures to address the potential risks posed by fintech companies and digital banking.

In conclusion, Bob Michele’s comments highlight the fragility of the banking industry in the United States and the importance of emergency lending programs for regional banks. While the potential collapse of First Republic Bank may not necessarily lead to a widespread collapse of the banking industry, it does underscore the need for policymakers to take proactive steps to ensure the stability of the financial system.


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First Citizens Bank to Acquire Silicon Valley Bank Deposits and Loans

First Citizens Bank, a North Carolina-based bank, is set to acquire Silicon Valley Bank’s deposits and loans following the latter’s collapse in March 2023. The Federal Deposit and Insurance Corporation (FDIC) approved the purchase and assumption agreement, which includes the acquisition of $72 billion of Silicon Valley Bridge Bank, National Association’s assets at a discount of $16.5 billion. The agreement also stipulates that 17 former branches of Silicon Valley Bank will operate as First Citizens Bank and Trust Company starting on March 27.

As part of the agreement, all Silicon Valley Bank depositors will automatically become depositors of First Citizens Bank. The FDIC will keep approximately $90 billion in securities and other assets in receivership for disposition. In addition, the FDIC will receive equity appreciation rights in First Citizens BancShares, Inc. common stock worth up to $500 million.

First Citizens Bank is now the 30th largest commercial bank in the US, with $167 billion in total assets and $119 billion in deposits as of March 10. The acquisition of Silicon Valley Bank’s deposits and loans is expected to boost the bank’s assets and expand its operations in California’s tech hub.

Silicon Valley Bank collapsed on March 10 after rumors of a severe liquidity crisis sparked a bank run. The FDIC was then appointed as the receiver of the failed bank and attempted to auction off the fallen bank’s assets. The process included two separate auctions for Silicon Valley Bank’s assets: one for its traditional deposits unit and the other for its private bank, which catered to high-net-worth individuals and was housed within its retail operations.

Several firms were reportedly planning or had submitted bids for Silicon Valley Bank. First Citizens Bank was one of them, with reports suggesting it had been planning a bid as early as March 18. Three days later, the bank reportedly submitted a bid for all of Silicon Valley Bank. A First Citizens spokesperson declined to comment on “market rumors or speculation” at the time. Valley National Bancorp was also understood to have submitted a bid for the collapsed bank.

Meanwhile, Citizens Financial Group, another US regional bank, was reportedly preparing to submit an offer for Silicon Valley Bank’s private banking arm. The bank’s collapse highlights the challenges faced by banks in the tech industry and the importance of maintaining adequate liquidity. The acquisition by First Citizens Bank underscores the bank’s confidence in the US banking system and its ability to weather crises.


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US Officials Consider Expanding Deposit Insurance Coverage

US officials are reportedly studying ways to expand deposit insurance coverage to protect depositors and prevent capital from being pulled from smaller banks to supposedly safer-looking heavyweights. The current deposit insurance cap under the Federal Deposit Insurance Corporation (FDIC) stands at $250,000. However, following the collapse of several banks in March, there have been calls to increase that amount.

Organizations such as the Mid-Size Bank Coalition of America have called for the cap to be lifted for the next two years. They argue that expanding the insurance coverage would provide necessary protection to depositors during these uncertain times.

According to a Bloomberg report on March 21, Treasury Department staff members are currently discussing the possibility of the FDIC being able to expand the current deposit insurance beyond the max cap to cover all deposits. The FDIC has reported that domestic U.S. bank deposits totaled $17.7 trillion as of December 31.

However, such a move would ultimately depend on the level of emergency authority federal regulators have and whether the insurance cap can be increased without formal consent from Congress. Bloomberg’s sources indicated that U.S. authorities do not deem such a drastic move necessary at the moment, as recent steps taken by financial regulators are likely to be sufficient. The potential strategy is being considered just in case the current situation worsens.

In response to recent bank collapses, the Federal Reserve rolled out the $25 billion Bank Term Funding Program (BTFP) on March 13 to stem any further contagion. This move by the government is an attempt to maintain stability in the financial system and restore confidence in banks.

Meanwhile, in a March 20 press briefing, White House Press Secretary Karine Jean-Pierre was asked about the federal government’s view on expanding FDIC insurance beyond $250,000. Jean-Pierre emphasized that the government’s focus is on ensuring the stability of the financial system and creating a fair playing field for all banks. She also highlighted that recent actions taken by the government have instilled confidence in the public regarding their deposits, stating that “Americans should be confident of their deposits. We’ll be there when they need them.”

While the current situation may not require such a drastic move, the possibility of expanding deposit insurance coverage beyond the current cap is being considered. The government will continue to monitor the situation and take necessary steps to ensure the stability of the financial system.


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