In a recent report from the Federal Deposit Insurance Corporation (FDIC), the recent failure of New York-based Signature Bank has been attributed to “poor management” and crypto. Among the reasons for failure, the FDIC also cites the aggressive pursuit of “rapid, unrestrained growth” with a disregard for risk management.
The 63-page document released on Friday criticized the bank’s leadership for chasing growth and deposits. According to the FDIC, they did so without putting in place “adequate risk management practices and controls.” These controls should have been in proportion to the size, complexity, and risk profile of the institution, the FDIC said.
The FDIC added that its supervisory staff was under-resourced for the task of overseeing the bank, an issue it acknowledged as a significant obstacle to its mission of maintaining the safety and soundness of the banking system.
Today, we released the findings of an internal review from our Chief Risk Officer on our supervision & cause of the failure of Signature Bank. The report also recommends matters for consideration related to examination guidance, processes, and resources.https://t.co/YlpoZZ803U pic.twitter.com/sWfgLcBclC
— FDIC (@FDICgov) April 28, 2023
Signature Bank’s collapse on March 12 came two days after the shutdown of Silicon Valley Bank (SVB). Moreover, the main reason the bank collapsed was a deposit outflow of over $42 billion in a single day. The same day SVB failed, Signature lost 20% of its total deposits within hours. Then, everything began crumbling down; FDIC Chair Martin Gruenberg stated.
According to the report, Signature’s leadership “rejected examiner concerns about the stability of uninsured deposits” until a run started on March 10, 2023. Additionally, the FDIC pointed out that the management of Signature Bank “failed to acknowledge the severity of the problem.”
A week after its collapse, Flagstar Bank agreed to purchase almost all of the deposits and loans from Signature. For your information, Flagstar Bank is a subsidiary of New York Community Bancorp. This deal was estimated to cost the FDIC’s Deposit Insurance Fund over $2.5 billion.
Signature Bank’s Failure And Crypto Integration
Signature Bank had $110.36 billion in assets and $88.59 billion in deposits at the end of 2022. Like SVB, it relied heavily on uninsured deposits and experienced a growth boom a few years ago. Between the years 2019 and 2020, the bank experienced a 64% growth in assets.
In a bid to prevent more bank runs, U.S. officials invoked a “systemic risk exception” to back all deposits at both Signature and SVB. This would include even those above the FDIC-insured amount.
Signature Bank had a diverse business, including commercial real estate and digital asset banking. Nearly 25% of its deposits came from the cryptocurrency sector as of September. However, in December, the bank announced plans to reduce its crypto-related deposits by $8 billion. The remaining deposits from crypto clients were not part of the rescue deal with Flagstar. Experts are blaming cryptocurrencies and Bitcoin for the bank’s failure, and some authorities are backing them.
Department of Finacial Services: “Crypto Did Not Collapse Silvergate Bank”
The New York State Department of Financial Services denied the speculation that the regulator closed the bank due to its involvement in cryptocurrencies. The agency maintained that Signature’s failure to provide reliable and consistent data amid increasing withdrawal requests led to the decision to close the bank. Of course, everything that was happening led to a decrease in the bank’s ability to operate safely and soundly the next day.