Downfall of the signature bank: contagion or business problem?
The collapse of Signature Bank came surprisingly quickly, leaving the question of whether there was a fundamental flaw in the way it did business – or whether it was just a victim of the spreading panic after the collapse of the Silicon Valley Bank.
There were few outward signs that Signature Bank was collapsing before the New York Treasury Department on Sunday seized the bank’s assets and the Federal Deposit Insurance Corp. asked to take over her business. The FDIC will operate it as a signature bridge bank until it can be sold.
But in the run-up to the takeover, there were calls on social media to warn savers not to take their money out of the bank — and a real frenzy of withdrawals followed. There has not yet been a public account of how much money has been withdrawn from the bank, which has historically been friendlier than most in the US to the cryptocurrency industry.
“In the case of Signature Bank, it’s not about a specific sector,” Adrienne Harris, Superintendent of the Department of Financial Services, said at a news conference this week. “But we acted quickly to ensure depositors were protected.”
The department has described the New York-based financial institution as a “traditional commercial bank,” but its two-decade history has certainly been unconventional.
Signature was aimed at privately held companies and their owners and executives. In terms of deposits, it became one of the 20 largest banks in the country. It was also the third-largest US bank to fail by the same measure, following the collapse of Washington Mutual in 2008 and the demise of Silicon Valley Bank last week.
Founded in 2001, it has been a major lender to New York City apartment building owners. Clients included former President Donald Trump and the family of his son-in-law and former White House aide Jared Kushner. Trump’s daughter Ivanka, who also became a key adviser to the Trump administration, served on the bank’s board of directors from 2011 to 2013 before her father ran for president.
She wasn’t the only high-profile member of the board. Two former members of Congress have also served him over the years: Senator Alfonse D’Amato, a New York Republican, and Rep. Barney Frank, a Massachusetts Democrat who co-authored the landmark 2010 law that overhauled regulation of the financial industry .
Signature also made loans to New York City cab drivers looking for medallions, a struggling part of the business as ride-sharing services like Uber and Lyft took off and the value of medallions plummeted.
Unlike most US banks, it has also been friendly to cryptocurrency companies, becoming the first FDIC-insured bank to offer a blockchain-based digital payments platform in 2019.
Partly due to crypto, the bank’s deposits grew 67% in 2021. But last year when crypto exchange FTX crashed and filed for bankruptcy, signature withdrawn. Its deposits fell by $17 billion, or nearly 17%, over the year. Most of this was due to what the bank described as a “planned reduction” in crypto-related assets.
In a January earnings release, Joseph DePaolo, Signature’s then-CEO, said the bank plans to expand geographically.
“We see growth on the horizon,” DePaolo said.
Even as he made the prediction, the bank’s stock fell amid crypto battles and a broader stock market slump. After peaking at $365 in early 2022, the bank’s stock plummeted to less than a third of that value by the end of February this year. The free fall began this month until trading halted on March 10 and the stock traded at $70.
It was a go-to place for the crypto industry until its closure. Konstantin Shulga, co-founder and CEO of Cyprus-based Finery Markets, which connects cryptocurrency businesses with banks and other businesses, said many of his firm’s clients have been banking with Signature or Silvergate Capital, who voluntarily closed their bank last week and warned them have could end up being “less than well capitalized”.
Shulga said that having so few banks to take care of the cryptocurrency industry is a problem.
“Both parties failed because of this concentration,” he said. “Customers failed because they were only forced to operate within those two banks, and banks failed because they couldn’t pick up more business from other areas to diversify.”
The other problem, he said, was that social media was accelerating the run on signature deposits.
Twice in March, Signature took the unusual step of issuing financial updates as depositors fled Silicon Valley Bank, which was taken over by regulators two days before Signature.
As of March 11, 80% of its deposits came from “mid-market” companies, including law and accounting firms, healthcare companies, manufacturers and real estate management firms.
But it also shared a key trait with Silicon Valley Bank, which was a major player in funding the tech industry: a high proportion of uninsured domestic deposits. Signature Bank ranked fourth in this category at the end of 2021, with nearly 90% uninsured. Second was Silicon Valley Bank. Uninsured deposits are amounts in excess of the FDIC insurance limit of $250,000 per individual account. Only after the takeover of the bank did the FDIC waive the insurance cap for depositors both in it and in the Silicon Valley Bank.
Meanwhile, the bank’s reassurances didn’t slow withdrawals, which spiked on Friday and then continued into the weekend until regulators stepped in.
Frank, the former congressman, called it “an unwarranted total shutdown” and said he believes it happened because New York bank officials wanted to send a message to the banks to stay away from crypto business. He said things were stabilizing.
The state regulator that shut them down dismissed that claim, pointing to what bank executives did as withdrawals continued to increase.
“The bank failed to provide reliable and consistent data, resulting in a significant crisis of confidence in the bank’s leadership,” an agency spokesman said in an email.
A spokeswoman for the bank’s former executives declined to answer, but Frank said the numbers would change as the situation changed.
An autopsy of the bank could be carried out in court.
This week, a shareholder filed a lawsuit in US District Court in Brooklyn, alleging that the bank and its executives misrepresented the facts in their two assurances this month that business was healthy.
“We intentionally maintain a high level of capital, a strong liquidity profile and solid earnings,” said Eric Howell, Signature Bank’s then-president and chief operating officer, in a statement on March 9, three days before the bank ceased operations in its old form to exist. “This continues to differentiate us from competitors, especially in challenging times.”