FDIC says Signature Bank failed due to mismanagement, risky crypto deposits
A US Federal Deposit Insurance Corporation (FDIC) investigation into the failure of a signatory bank found the root cause of the problem to be “poor management” and risky cryptocurrency deposits.
The FDIC Comprehensive report The regulatory review covered the period from January 1, 2019 to March 12, 2019. within hours.
risky deposit
Prior to its bankruptcy, Signature Bank was the 29th largest lender in the United States with $110 billion in assets under management. After expanding its services to crypto-related companies, it experienced rapid growth from 2019 to 2021.
However, regulators have found that most of Signature’s deposits are uninsured and easy to withdraw if there is concern about bank failures.
“The reliance on signatures on uninsured deposits has created risks that banks must manage carefully in order to ensure adequate liquidity while maintaining a safe and sound business.”
The FDIC said the bank’s management did not understand the risks inherent in uninsured deposits and was unprepared for a crackdown by banks like Signature experienced. It added that almost all digital asset-related deposits in banks are uninsured.
In essence, lenders’ “growth has outpaced the development of risk management frameworks.”
The report also highlights a number of areas where the FDIC is “inadequate” in its oversight of signatory banks and needs improvement, particularly in providing timely guidance. Regulators said this was due to a shortage of available staff.
panic in the market
The regulator said the “direct cause” of the lender failures was the “surge in deposits” caused by the successive failures of Silvergate Bank and Silicon Valley Bank (SVB).
News of the two bank failures caused panic in the market, leading to a bank run that was “faster than any other bank run in history, except the one that just happened at SVB.”
Some panic was caused by depositors and the media seeing the signature as a “crypto bank” and tying it to other banks’ crises.
Signature’s liquidity management is sorely lacking, and faced a cash shortfall of approximately $4 billion on March 10, making it unable to meet unprecedented withdrawal requests.
The only option left was to secure an emergency loan from the New York Department of Financial Services (NYDFS). But the lender didn’t have enough assets to commit to a loan and it took weeks to properly screen.
Meanwhile, projected lender withdrawals have risen exponentially, from $2 billion to $7.9 billion over the weekend.
Regulators then decided that a foreclosure was the best course of action as Signature was unsatisfied and took over the bank on March 12th.
