The news: Small banks that saw an opportunity in crypto are now feeling the effects, per the Wall Street Journal. There are lessons to be learned by big banks pleading for a larger role in the asset class.
The role of small banks: At the advent of crypto and digital assets, small banks saw an avenue to build a place for themselves in the sector and provide a service that most larger banks shied away from.
Banks like Silvergate Capital, Signature Bank, and Customers Bancorp took on billions of dollars in deposits from crypto exchanges, investment firms, and stablecoin issues. But 2022 has been a year unlike any other.
Driving deposits: Smaller banks often struggle to maintain a healthy level of deposits as customers are enticed away by bigger banks’ better rates and other incentives. The crypto market offered small banks an alternative to boosting their deposits.
This year offers a prime example of quickly changing deposit levels. When crypto market volatility spiked, banks saw an increase in deposits, trading decreased, and investors waited to see how things would play out. But when investors learned their assets weren’t insured, they flocked to divest from the asset class and pull their deposits.
The bigger picture: While smaller banks have been the main players for crypto exchanges and issuers, big banks are petitioning for a position in the field. Earlier this month, banks made a case to the Biden administration for having a bigger role in developing digital asset regulation and for permission to engage in further crypto activities.
Lessons learned: Bigger banks considering entering the digital asset market should look at lessons the smaller banks learned in H1 2022.
Despite the challenges, many of these smaller banks are profitable. Silvergate and Signature both recorded record profits in Q2. And Consumers Bancorp’s head of digital banking, Christopher Smalley, said the risks are worth it to bring on large deposits from the crypto firms. The risks simply require preparation and planning.
This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.
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