US Lenders on the Brink of Insolvency, How It Could Affect Crypto

3d illustration of bank collapse concept, over white background
Source:AdobeStock
  • The US banking industry is struggling in the current economic environment, with billions of paper losses held across hundreds of institutions. 
  • The Federal Deposit Insurance Corp. (FDIC) added another 11 institutions to its “problem bank list”, indicating 63 banks are now facing potential insolvency.
  • However, this level of loss is far from a crisis and is unlikely to impact the crypto industry – at least in the short term.

Ahhh, banks. Once the arch-nemesis of crypto, these financial institutions have been softening their stances to become more of a secondary antagonist behind Gary Gensler and his cronies. However, given the mirth they treated the crypto sector with for the best part of a decade, it’s hard to avoid a little schadenfreude when reading the words “banking crisis”. 

According to the Federal Deposit Insurance Corp. (FDIC), “paper losses” for US banks reached a whopping US $517b (AU $777b) throughout the first quarter of 2024. The assets bleeding value primarily comprise securities that have been negatively impacted by steady rate rises.

The losses, which have been occurring at a drastic level since 2022, ramped up the number of “problem banks” hanging around the US. The FDIC’s list of institutions with “operational or managerial weaknesses” climbed to 63 – up from 52 in December last year.

Related: Fundstrat’s Tom Lee Predicts June Stock Market Rally, Says Institutional Adoption To Propel Bitcoin to $150,000

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Banking Collapse Unlikely As “Problem Banks” In “Normal Range”

Generally, crypto enthusiasts tend to think of bank failures as a good thing for the industry. In theory, it validates the whole reason the blockchain was invented in the first place – failures with centralised finance. 

However, in real terms, crypto (and Bitcoin in particular) is still beholden to broader macroeconomic conditions. This is especially true given heightened institutional involvement in the sector. 

So, if a large-scale bank collapse causes a financial crisis, a negative impact on crypto’s price is more likely than not thanks to less money circulating. In tenuous economic situations, people tend to tighten their belts and move toward conservative assets – even if crypto presents itself as the logical alternative to cash.

However, all the noise may be much ado about nothing. According to the FDIC chairman, the number of banks facing potential insolvency is actually in the “normal range for non-crisis periods of 1 to 2% of all banks”.

So discourse surrounding a mass-scale banking contagion might just be a little pre-emptive. 

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Ben Knight
Author

Ben Knight

Ben Knight is a writer and editor from Melbourne with a passion for all things music and finance. He enjoys turning complex topics – especially the technical details of cryptocurrency – into digestible bites that anybody can understand. He acquired his Master’s in Writing, Editing and Publishing from RMIT in 2019 and has run his own creative writing business ever since.

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