Coppola Comment

This is a slightly amended version of a keynote speech I gave on 14th April 2023 at the University of Ghent, for the Workshop on Fintech 2023.  The crisis that has engulfed crypto in the last year is a crisis of fractional reserve banking. Silvergate Bank and Signature Bank NY were fractional reserve banks. So too were Celsius Network, Voyager, BlockFi, Babel Finance and FTX. And still standing are the crypto fractional reserve banks Coinbase, Gemini, Binance, Nexo, MakerDAO, Tether, Circle, and, I would argue, every one of the DeFi staking pools. All of these are doing some variety of fractional reserve banking. Custodia Bank and Kraken Finance claim to be full-reserve banks – but 100% reserve backing for deposits is both hard to prove and not a guarantee of safety. What do I mean by “fractional reserve banking”? My definition might surprise you. For me, fractional reserve banking simply means that the composition of a bank’s assets is less liquid than that of its liabilities. Fra

This is the story of a bank that put all its eggs into an emerging digital basket, believing that providing non-interest-bearing deposit and payment services to crypto exchanges and platforms would be a nice little earner, while completely failing to understand the extraordinary risks involved with such a venture.  On 1st March, Silvergate Capital Corporation announced that filing of its audited full-year accounts would be significantly delayed , and warned that its financial position had materially changed for the worse since the publication of its provisional results on January 17th, when it reported a full-year loss of nearly $1bn. The stock price promptly tanked, falling 60% during the day:   Platforms, exchanges and other banks halted or re-routed transactions on Silvergate's SEN payments network, and customers that had other banking relationships removed their deposits. In response, Silvergate halted the SEN network. A banner on its website now reads: Effective immediately

Celsius Network was never a real business. It did not have a viable business model. Really, it was a momentum trading scheme that relied on the premise that crypto prices would always rise. And when they didn't, it resorted to fake valuations and market manipulation to escape insolvency. It was fraudulent from the start.   This is the conclusion I've reached after studying the U.S. Examiner's final report (yes, I've read all 476 pages of it) and Celsius's audited reports and accounts up to 31st December 2020.  There are no more recent audited accounts. It was due to file its 2021 accounts by 31st December 2022, but it did not do so. The accounts are now significantly overdue. I doubt if they will ever be filed.  The U.S. Examiner's report reveals deep and long-lasting insolvency, concealed by layer on layer of fraud. Whether Alex Mashinsky, Celsius's founder, owner and CEO, knew that the devices he used to conceal the company's insolvency were fraudulen

In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation. This diagram shows how it worked (the “border” is the residency border beyond which US bank regulation has no traction): But it is not the model itself so much as Shin's remarks about the role of European regulation after the introduction of the

At the ICAEW's conference "Do Banks Work?" last week, there was a fascinating interchange between Ian Gorham of Hargreaves Lansdowne and RBS's Ross McEwan. Apparently RBS had refused a large deposit from Hargreaves Lansdowne, to the irritation of the asset manager. "There is a problem placing client money", said Gorham. And he went on: "Banks don't need people's savings, because they now have much more capital to support lending. This means that savers receive much lower interest rates on deposits. For an ageing society, this is a problem".  This is a variant on the "banks don't need savings because they are awash with cash due to QE" meme. It does at least have the merit of understanding the structure of a balance sheet - for the same assets, if you have more equity you need less debt. But the WHOLE POINT of all the regulatory reforms of the last seven years was to force banks to deleverage - permanently. The inevitabl