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 covers the period from January 1 to March 12, 2019, and New York licensed banks were seized by regulators after experiencing a $18.6 billion bank run. I was. within hours.
Prior to its bankruptcy, Signature Bank was the 29th largest lender in the United States with $110 billion in assets under management. From 2019 to 2021, it experienced rapid growth after expanding its services to crypto-related companies.
However, regulators have found that most of Signature’s deposits are uninsured and could be withdrawn if there were concerns about bank failure.
“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 bank run like the one experienced by Signature. 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 lack 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). However, the lender did not have enough assets to commit to the loan and it took several weeks to properly consider the assets.
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.