The US Federal Deposit Insurance Corporation (FDIC) investigation into the collapse of Signature Bank found that the main cause of its problems was “mismanagement” and risky crypto deposits.
The FDIC released itsat Signature Bank and the reasons that led to its bankruptcy on April 28. The regulator’s review covered the period from January 1, 2019, to March 12, when regulators seized the chartered New York bank after experiencing an $18.6 billion bank run. within hours.
Before its 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 prone to withdrawal if there were ever concerns about the bank failing, and that’s essentially what happened when two banks they considered to have a foundation collapsed. of similar clients.
“Signature’s reliance on uninsured deposits posed a risk that the Bank had to manage carefully to ensure adequate liquidity and maintain 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 type of bank run Signature experienced. He added that almost all digital asset-related deposits at the bank were uninsured.
Essentially, the “growth of the lender outpaced the development of its risk control framework.”
The report also highlighted a number of areas where the FDIC “fell short” in its supervision of Signature Bank and needs to improve, 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 “deposit run” triggered by back-to-back failures at Silvergate Bank and Silicon Valley Bank (SVB), which were perceived as strongly connected to digital assets.
News of the collapse of the two banks caused a market panic, leading to a bank run that “was faster than any other bank run in history, except for the run that had just occurred on SVB.”
In part, the panic was caused by depositors and the media deeming Signature a “cryptobank” and linking it to the crisis at the other banks.
Signature’s liquidity controls were severely lacking and it failed to honor record withdrawal requests as it faced a nearly $4 billion cash shortfall on March 10.
The only option left to him was to obtain an emergency loan from the New York Department of Financial Services (NYDFS). However, the lender had no eligible assets to pledge for the loan, and the assets he did have required several weeks to properly review.
Meanwhile, the lender’s estimate of expected withdrawals was rising at an exponential rate, rising from $2 billion to $7.9 billion over the weekend.
Regulators subsequently decided that the best course of action was seizure as Signature was unable to satisfy and took over the bank on March 12.