Agencies issue joint statement on liquidity risks resulting from crypto-asset market vulnerabilities

The Board of Governors of the Federal Reserve System (FED), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have issued a joint statement as regards possible liquidity risks that may arise within financial institutions when relying on deposits from crypto-asset related entities for funding their business operations (loans / credits). Specifically, the regulators note that banks, building societies, or saving associations may suffer sudden outflows of deposits of crypto-asset related entities depending upon market volatility, stress scenarios, or customer demand. They may also encounter sudden withdrawals, if such deposits constitute stablecoin-related reserves.
Therefore, the three regulators highly recommend financial institutions to
– get to know the factors that drive the crypto-asset related entity’s need for cash and changes in the crypto-assets market;
– carefully assess any concentrations of such deposits;
– incorporate any volatility from deposits of crypto-asset related entities in their risk management practices and stress testing scenarios; and
– perform enhanced due diligence on such customers to ensure that claims made by themselves to their own clients about the bank deposits are truthful.
Additionally, institutions need to review applicable state laws and regulations and need to ascertain to comply with any financial reporting obligations in this context.