Why Signature Bank Failed, Revealed in FDIC Post-Mortem Report

• The FDIC released a report highlighting the reasons behind SNBY’s failure. 
• The regulator blames poor management and inadequate risk management.

In March 2023, three major crypto-friendly banks closed in a span of five days. Silvergate Bank voluntarily closed on March 8, 2023, with around $12 Billion in assets, Silicon Valley Bank itself went into the receivership of the Federal Deposit Insurance Corporation (FDIC) on March 10, with $200 Billion in assets, and Signature Bank of New York (SBNY) was closed by state regulators on March 12, 2023, with $100 Billion in assets. The U.S. FDIC released a post-more report of SBNY blaming poor management and meager risk management practices for closure. 

The U.S. FDIC Reseales SBNY Post-Mortem Report

Federal regulators closed Signature Bank of New York on March 12, 2023, to protect the United States economy and reinforce public confidence in the already fragile banking system. They appointed the FDIC to handle the insurance process. After more than a month, on April 29, 2023, the regulating agency released a report on the matter that brought the major banking collapse to the fore. 

It says that the collapse of Silvergate Bank and Silicon Valley Bank was caused by illiquidity due to deposit runs. It further stated the root cause for the SBNY’s failure was poor management. The management never prioritized good governance practices and did not always heed FDIC examiner concerts. They were primarily unresponsive and sometimes late in addressing FDIC supervisory recommendations (SRs). 

They blamed the SBNY’s board of directors and management for pursuing “unrestrained growth.” They used uninsured deposits without implementing any liquidity risk management strategies. They went down because they failed to manage the liquidity, which required handling the influx of withdrawal requests. 

The significant events in the crypto industry, like the collapse of the Terra Ecosystem, the halting of withdrawals by Celsius, Voyager’s bankruptcy, FTX-sag, Genesis’ bankruptcy, and Silvergate’s announcement of a shutdown, badly affected the stock prices of SBNY. 

Since 2017, the FDIC has sent multiple supervisory letters to the Signature Bank regarding regulatory, audit, or risk management criticism. The detailed list of which is shown below. Due to non-compliance with the recommendations, the FDIC was forced to downgrade SBNY’s Liquidity component rating to 3 in 2019. This step highlighted the requirements for the improvement of their fund management practices. 

Before its collapse in March, the Signature Bank was in the crosshairs of the United States Department of Justice (DoJ) and the FDIC for money laundering. A March 15 report from the DoJ states the agency was investigating the bank for potential money laundering. There were also reports that the U.S. The Securities and Exchange Commission (SEC) also scrutinized SBNY, but it’s unclear if the probe resulted in the bank’s closure. 

The subsequent closure of major crypto-friendly banks created a void in the industry. Ironically, the industry claims to form a decentralized system parallel to the current banking system. Still, they depend extensively on the banks for withdrawals, deposits, employee payments, etc. Since the debacle, the industry has sought a suitable banking partner to facilitate its operations. 

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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