Why are Banks better poised than crypto platforms to manage liquidity meltdown?
What is a Bank Run?
It’s been a while since we heard of the term ‘bank run’ until the recent shortfall in liquidity resulting in the "collapse" of various crypto platforms. So what exactly is a ‘bank run’?
Photo by Eduardo Soares on Unsplash
Imagine when there are masses out there suddenly fearful of their banks turning insolvent for whatever reason. Naturally they will attempt to withdraw all the money which they have deposited with the bank. Now this is a bank run and it could end up with more people following suit when they see long queues at bank branches or ATMs. If uncontrolled, it may have a deep impact on the Bank's liquidity.
How are Banks better prepared to manage Bank Runs?
In such situations, most banks are under strict regulatory requirements to have a robust liquidity, capital and business continuity risk management framework. Banks are hence better prepared to respond to bank runs as compared to crypto platforms.
Will Central Bank help the Banks out during bank runs?
If the central bank deems the troubled Bank credit worthy and contributing value to the nation, then they will likely accede to Bank's loan request to help them avert the crisis. This is also to avoid a domino effect in case if there is significant dependency between the banks, or if the public panic spreads from one bank to the other.
Why aren't the Central Bank stepping in for Celsius or Hodlnaut?
Photo by Vinicius Marques on Unsplash
So in the recent spate of Celsius and Hodlnaut cases, we don’t see any central bank interventions to save them. Celsius or Hodlnaut ended up halting withdrawals from their users during the dire market conditions. Generally, regulators find that crypto does not has a wide economical outreach. They likely assess that crypto collapse will have minimum impact to the economy, monetary policy and strength of the currency of the country. So even though indeed there are people affected, the impact ain't strong enough for Central Banks to step in for rescue.
With the recent saga, I hope more can understand the risks involved when "trusting" crypto platforms and also better appreciate the security and ease of mind which bank’s can offer despite the low interest rates.
Let me know your thoughts on whether Central Bank should step in at all.
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The idea of regulation making something safer is absurd in my view. We saw many instances where regulated entities and industries cost people a lot of money.
For example, the bank run for the Great Financial Crisis was due to collateral going bad globally. The banking and financial sectors were all regulated and yet they crashed the global economy.
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True, the bank run then had provided valuable lessons to both regulators and bank customers. Nevertheless, I do welcome regulations which can help bring justice to crypto teams who deal with funds irresponsibly. These will help deter such behaviors and make it safer for commoners like myself 🙂
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