FDIC Chair: Signature Bank Didn’t Understand Crypto’s Risks Leads to Its Rapid Failure

Key Points:

• The FDIC chairman feels the Signature Bank’s inability to recognize the dangers involved with cryptocurrency hastened its demise.
• Gruenberg also mentioned SVB and Silvergate Bank’s recent problems.

Martin Gruenberg, head of the US Federal Deposit Insurance Corporation (FDIC), said at a hearing on “Oversight of Prudential Regulators” that bad management was the primary reason for Signature Bank’s demise.

According to the FDIC’s chief risk officer, bank management failed to prioritize good governance initiatives, was slow to respond to FDIC regulatory advice, and failed to implement basic liquidity risk management practices due to an overreliance on uninsured deposits and control to finance its rapid growth.

“Signature Bank funded its rapid growth through an overreliance on uninsured deposits without implementing fundamental liquidity risk management practices and controls. Additionally, the bank failed to understand the risk of its association with, and reliance on, crypto industry deposits or its vulnerability to contagion from crypto industry turmoil that occurred in late 2022 and into 2023.”

According to the FDIC, Signature Bank relied heavily on uninsured deposits, lacked appropriate liquidity risk management strategies, and had poor risk management in general. All of this, according to a federal bank supervisor, was exacerbated by a bank run precipitated by the demise of the other banks. The bank’s service to the crypto business was also recognized as a big danger.

While the fallout from Silvergate’s liquidation and the failure of Silicon Valley Bank (SVB) was unprecedented, Gruenberg claims that Signature Bank’s poor governance and risk management practices prevented the bank from effectively managing its liquidity during times of stress, leaving it unable to meet very large withdrawal requests.

In debates about cryptocurrency, many authorities and politicians continue to bring up the failures of Signature Bank, Silicon Valley Bank, and Silvergate Bank. On the other hand, the preliminary examination conducted by the US Government Accountability Office did not directly blame crypto exposure for the failure of Signature Bank.

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Harold

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