FDIC says Signature Bank failed due to mismanagement, risky crypto deposits

The US Federal Deposit Insurance Corporation (FDIC) investigation into the collapse of Signature Bank found that the root cause of the problems was “poor management” and risky crypto deposits.

The FDIC released its comprehensive report on Signature Bank and the causes of its failure on April 28. The regulator’s review covered the period from January 1, 2019 to March 12 – when the New York-chartered bank was seized by regulators after experiencing an $18.6 billion bank loss in a matter of hours.

Risky deposits

Before the collapse, Signature Bank had $110 billion in assets under management and was the 29th largest lender in the United States. It experienced rapid growth between 2019 and 2021 after expanding services to crypto-related companies.

However, the regulator found that the vast majority of Signature’s deposits were uninsured and subject to withdrawals if there were ever concerns about the bank’s failings — and that’s essentially what happened when two banks deemed to have a similar customer base collapsed.

“Signature’s reliance on uninsured deposits posed a risk that the bank had to manage carefully to ensure sufficient liquidity while maintaining a safe and sound business.”

The FDIC said the bank’s management did not understand the inherent risk of uninsured deposits and was not prepared for the type of bank run that Signature experienced. It added that almost all of the digital asset-related deposits in the bank were uninsured.

Essentially, the lender’s “growth outpaced the development of the risk control framework.”

The report also highlighted a number of areas where the FDIC “fell short” in overseeing Signature Bank and needs to improve — particularly in providing timely guidance. The regulator said this was due to a lack of available staff.

Panic in the markets

The regulator said the “immediate cause” of the lender’s collapse was a “progressive run on deposits” triggered by the subsequent failures of Silvergate Bank and Silicon Valley Bank (SVB) – both perceived to be heavily linked to digital assets.

The news of the two banks’ collapse created panic in the market which led to a bank run that “was faster than any other bank run in history, apart from the run that had just taken place at SVB”.

The panic was caused in part by depositors and the media considering Signature a “crypto bank” and linking it to the crisis at the other banks.

Signature’s liquidity controls were seriously flawed, and it was unable to meet the unprecedented withdrawal requests when it faced a cash shortfall of nearly $4 billion on March 10.

The only option it had left was to secure an emergency loan from the New York Department of Financial Services (NYDFS). However, the lender did not have acceptable assets to pledge the loan, and the assets it had taken several weeks to properly review.

Meanwhile, lenders’ estimate of expected withdrawals rose at an exponential rate — from $2 billion to $7.9 billion over the weekend.

Regulators then decided the best course of action was seizure, as Signature was unable to satisfy and took over the bank on March 12.