The U.S. Federal Deposit Insurance Corporation (FDIC) investigation into Signature Bank’s collapse found that the root cause of the problems was “poor management” and high-risk crypto deposits.
The FDIC released its comprehensive report on Signature Bank and the reasons that led to its bankruptcy on April 28. experienced a bank run of $18.6 billion within hours.
Risky deposits
Before the collapse, Signature Bank had $110 billion in assets under management and was the 29th largest lender in the US. It experienced rapid growth between 2019 and 2021 after expanding services to crypto-related businesses.
However, the regulator found that the vast majority of Signature’s deposits were uninsured and subject to withdrawal if there were ever any concerns about the bank’s bankruptcy — which is essentially what happened when two banks thought to have a similar customer base , collapsed.
“Signature’s reliance on uninsured deposits posed a risk that the bank had to carefully manage to ensure adequate liquidity while maintaining a safe and sound business.”
The FDIC said the bank’s management did not understand the inherent risks of uninsured deposits and was not prepared for the kind of bank run Signature was experiencing. It added that almost all digital asset-related deposits with the bank were uninsured.
Essentially, the lender’s growth has outpaced the development of its risk management framework.
The report also highlighted a number of areas where the FDIC “failed” in oversight of Signature Bank and need improvement, particularly in providing timely guidance. The regulator said this was due to a shortage of available staff.
Panic in the markets
The regulator said the “immediate cause” of the lender’s collapse was a “propulsive run on deposits” fueled by the successive failures at Silvergate Bank and Silicon Valley Bank (SVB) – both of which were seen as heavily linked to digital assets .
News of the collapse of the two banks created panic in the market, leading to a bank run that was “faster than any other bank run in history, except the one that had just occurred at SVB.”
Part of the panic was caused by savers and the media viewing Signature as a “crypto bank” and linking it to the crisis at the other banks.
Signature’s liquidity controls were severely lacking and it was unable to meet unprecedented withdrawal requests as it faced a cash shortfall of nearly $4 billion as of March 10.
The only option it had left was to get an emergency loan from the New York Department of Financial Services (NYDFS). However, the lender had no acceptable assets to pledge the loan, and the assets it did have took several weeks to be properly assessed.
Meanwhile, the lender’s estimate of expected withdrawals rose exponentially — from $2 billion to $7.9 billion over the weekend.
Regulators then decided the best course of action was a foreclosure since Signature was unable to comply and took over the bank on March 12.