Why Regulators Seized Signature Bank in the Third Largest Bank Failure in U.S. History
Signature Bank customers, spooked by the sudden collapse of Silicon Valley Bank, withdrew more than $10 billion in deposits on Friday, a board member told CNBC.
This run on deposits quickly led to the third largest bank failure in US history. Regulators announced Sunday evening that Signature was supported to protect its depositors and the stability of the US financial system.
The sudden move shocked executives at Signature Bank, a New York-based institution with strong ties to the real estate and legal industries, said board member and former U.S. Representative Barney Frank. 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.
“We had no indication of any issues until we received a filing late Friday, which was purely contagious from SVB,” Frank told CNBC in a phone interview.
Problems for US banks exposed to the Covid pandemic’s foamiest asset classes – crypto and tech startups – escalated last week with the shutdown of the crypto-centric Silvergate Bank. While the demise of this firm was long overdue, it helped spark a panic about banks with high levels of uninsured deposits. Venture capitalists and founders emptied their Silicon Valley bank accounts on Thursday, leading to its seizure Friday midday.
This led to pressure on Signature, First Republic and other names late last week over concerns that uninsured deposits could be blocked or lose value, which could be fatal for startups.
Signature Bank was founded in 2001 as a friendlier alternative to the big banks. It expanded to the West Coast and then opened up to the crypto industry in 2018, which has helped boost deposit growth in recent years. The bank created a 24/7 payment network for crypto customers and had $16.5 billion in customer deposits tied to digital assets.
But as waves of concern spread late last week, Signature customers shifted their deposits to bigger banks, including JPMorgan Chase and Citigroup, Frank said.
According to Frank, Signature’s executives have explored “all avenues” to consolidate its situation, including finding more capital and assessing the interest of potential buyers. The exodus from deposits had slowed on Sunday, he said, and leaders believed they had stabilized the situation.
Instead, key Signature executives were summarily fired and the bank was closed on Sunday. Regulators are currently driving a sales process for the bank, while ensuring customers will have access to deposits and service will continue without disruption.
This decision raised some eyebrows among observers. In the same Sunday announcement that identified SVB and Signature Bank as financial stability risks, regulators announced new facilities to bolster confidence in the country’s other banks.
Another bank that had been under pressure in recent days, First Republic said it had more than $70 billion in untapped funding from the Federal Reserve and JPMorgan Chase.
For his part, Frank, who helped draft the landmark Dodd-Frank law after the 2008 financial crisis, said there was “no real objective reason” for Signature to be seized.
“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” Frank said. “We became the poster child because there was no fundamentals-based insolvency.”