Is Crypto a Scapegoat for Fed Policy?
Signature BankSBNY, one of the largest banks in the United States, has been forced out of business by the New York Department of Financial Services (NYDFS). Regulators are now carrying out a sales process for the bank, while guaranteeing that customers will have access to deposits and service will continue uninterrupted. The move has sparked controversy.
Silicon Valley Bank shut down and then regulators stepped in to provide access to deposits. Much has been written about what caused this: the lack of risk management – and the duration mismatch between assets and liabilities in mortgage-backed securities and bonds bought in zero interest environments to get returns. In record high interest rate environments, when called in early, they must be sold at a discount to meet depositor requests. This led to the charge against the bank which was then avoided by the US authorities – but then Signature was shut down immediately after that.
There has been plenty of criticism of the Fed’s policy and interest rate increases, which have led to instability in the bank’s financial management. There has also been a flurry of regulatory enforcement actions against the crypto industry in 2023. So was the reason for the Signature shutdown a concern for another run on another bank, or was this operation choke point 2 on crypto?
“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” said board member and former congressman Barney Frank, who helped draft the landmark Dodd-Frank Act after the 2008 financial crisis. We became the poster boy because there was no insolvency based on the fundamentals.” There are many who believe that Signature would have been solvent on Sunday after withdrawals had subsided, even if they were illiquid. “We had no indication of problems until we got a deposit late on Friday, which was pure contagion from SVB,” Frank told CNBC in a phone interview. According to Frank, Signature executives were exploring “every avenue” to shore up the situation, including finding more capital and gauging interest from potential acquirers. The deposit exodus had slowed by Sunday, he said, and managers believed they had stabilized the situation. However, the bank was closed due to “systemic risk” concerns, and even the FDIC was surprised by the actions of the NYDFS.
Signature had 40 branches, assets of $110.36 billion and deposits of $88.59 billion at the end of 2022, according to a regulatory filing. Signature Bank was founded in 2001 as a more business-friendly alternative to the big banks. It expanded to the West Coast and then opened up to the crypto industry in 2018, contributing to turbocharged deposit growth in recent years. The bank created a 24/7 payment network for crypto clients called Signet, which was an important part of the crypto infrastructure, and had $16.5 billion in deposits from digital asset-related clients, around a quarter of the deposits putting it in the top banks for crypto companies .
Another bank that had been under even more pressure than Signature in recent days, First Republic, however, was not closed. There were plenty of other regional banks to worry about, and First Republic and others were halted in the stock market on Monday after Signature closed. So why was Signature pulled from this package? Are regulators in the industry now to decide which bank had better assets or which depositors they like?
The question is, are the banks failing because of failed interest rate policies and regulatory oversight, or are they a systemic risk because they bankrolled crypto companies? Is the latter just good coverage for the former?
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