Regulatory Note — Crypto-Assets – Regulatory Statement on Deposit Risks
Yesterday, February 23, 2023, the three federal banking agencies issued a Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities (the “Joint Statement”). The Joint Statement discusses the volatility of and other liquidity risks associated with deposits that are placed at insured depository institutions by crypto-asset companies.
The Joint Statement breaks no new ground, but it reminds institutions that their liquidity risk management practices and contingency funding plans must take full account of several factors that increase the volatility of crypto-related deposits. This statement is the second piece this year of interagency guidance on crypto-assets; it follows a joint statement published in early January.
The Joint Statement focuses on two types of deposits that present particular risks and highlights four risk management considerations. The deposits that raise concerns are:
Deposits placed for the benefit of a crypto company’s customers. The stability or volatility of these deposits is driven by end customer reactions to market events, media reports, and uncertainty or by market sector dynamics, and not necessarily by the depositors – the crypto companies -- themselves. As a result, an insured depository institution may experience rapid inflows or outflows of deposits. Misrepresentations about deposit insurance could add to the volatility of these deposits.
Deposits that constitute stablecoin-related reserves. The risk of these deposits is a function of several factors, including the demand for stablecoins, confidence in stablecoin arrangements, and the stablecoin issuer’s reserve management practices. Unanticipated redemptions of stablecoins or adverse market events could result in sudden and unexpected deposit outflows.
The Joint Statement emphasizes four existing risk management tools for these deposit risks. The statement does not suggest any new risk management principles and refers insured depository institutions to existing liquidity risk management guidance – primarily an interagency policy statement from 2010 and the FDIC’s FIL-35-2022, as well as (for national banks and federal thrifts) OCC Interpretive Letters 1172 and 1179. The Joint Statement does encourage – meaning that the regulators would expect – insured depository institutions to:
Understand the factors that drive inflows and outflows of deposits from crypto-asset- related entities and the volatility of these deposits;
Assess the interconnectedness of crypto companies and the effect on deposits from all these companies;
Incorporate the liquidity risks and volatility of these deposits in the institutions’ contingency plans for funding, which could entail liquidity stress testing; and
Conduct robust due diligence of and monitor on an ongoing basis the crypto-asset- related depositors’ accounts. An institution should be sure to assess the representations made by these depositors to their end customers about these accounts, particularly representations about deposit insurance, that, if inaccurate, could cause sudden deposit outflows.