The Decline of Signature Bank

What are the implications for banks & how might this impact the crypto industry?

Signature Bank, a New York-based financial institution with $110.4 billion in total assets and total deposits of $82.6 billion, has been closed by regulators due to concerns of systemic risk and its potential to threaten the US banking system. The bank provided banking services to real estate companies, law firms, and cryptocurrency companies, with around 30% of its deposits coming from the crypto industry. The closure of the bank has created technical challenges for crypto companies as the bank operated Signet, a payments system used by crypto companies for on-ramps and off-ramps. However, the Federal Deposit Insurance Corporation (FDIC) established a bridge bank that will open its doors on Monday, with depositors and borrowers automatically becoming clients of this bridge bank. The closure of Signature Bank follows the voluntary liquidation of Silvergate Bank and the shutdown of Silicon Valley Bank (SVB), marking the third bank collapse in under a week.

The Federal Reserve System (“Federal Reserve”) and the FDIC released reports on April 28, 2023, detailing the agencies’ supervision history and analysis of the underlying causes of two high-profile bank failures in the United States. While each report squarely places responsibility for the failures on bank management, each report is also instructive for identifying supervisory shortcomings from the respective federal agency. This article discusses the implications of these reports for other financial institutions as well as the implications it may have on in the crypto industry.

What financial institutions can learn

Firstly, the reports signal a clear inflection point for the agencies, and other financial institutions may be wise to consider the changing regulatory winds. Institutions should revisit their most recent exam for issues identified as supervisory issues or recommendations and correct them promptly. The speed and frequency with which Matters Requiring Board Attention (“MRBAs”) are issued, CAMELS component scores are lowered, and informal and formal enforcement actions are sought is expected to increase in the coming months. Institutions should not expect to receive the same “benefit-of-the-doubt” response from the agencies going forward.

Secondly, banks that have experienced rapid growth should expect additional supervisory scrutiny. If there are concentrations, they will be highly scrutinized. Banks should document how they have grown their risk management structure commensurate with the size of the organization. They should be prepared to highlight and demonstrate mitigating factors that may exist for any concentrations, particularly as compared to their peer group. Such mitigating factors should be highlighted early.

Thirdly, capital remains intertwined with liquidity. The failure of SVB emphasized why strong bank capital matters. While the proximate cause of SVB’s failure was a liquidity run, the underlying issue was concern about its solvency. Banks should assess their capital adequacy and liquidity risk management practices and make necessary adjustments.

Signature Bank’s collapse casts a shadow on the Crypto Industry

The closure of Signature Bank follows the closure of Silicon Valley Bank, which had important ties to the crypto industry. Many companies in the crypto industry had accounts with SVB and were concerned about the financial stability of their banking partners after the bank’s implosion.

Signature Bank’s Signet, a payment system that facilitated the transfer of funds in and out of cryptocurrency, was critical for the efficient functioning of several major exchanges, such as Coinbase. However, after FTX’s collapse, Signature Bank decided to sell $8 billion in cryptocurrencies to minimize its involvement in an unstable industry. Although this decision caused concern in the crypto industry, Silvergate Bank was still available as another crypto-friendly option. However, Silvergate Bank was affected by the crypto market’s decline in value and declared on March 9 that it would close down. In the wake of Silvergate’s closure, JPMorgan forecasted that its clients would move to Signature Bank. Additionally, some venture capital investors and crypto executives were considering SVB as an alternative option.  However, SVB suffered from a swift bank run after many of its tech start-up clients pulled their deposits amid widespread concern about the bank’s cash balance. The collapse of SVB caused a panic across banks of similar sizes, with depositors rushing to get their money out before it was too late.

Bloomberg reported that U.S. prosecutors had been investigating Signature’s relationship with crypto clients and potential acts of money laundering before it was seized. Signature’s collapse was the third-largest commercial bank failure in U.S. history and unfolded days after SVB became the second-largest. The collapse of both banks has caused concern in the crypto industry, with some insiders speculating that the government’s actions might have “improperly contributed” to the banks’ failures.  Many in the crypto industry have cried foul, arguing that Signature’s seizure was unnecessary and targeted specifically against them. The collapse of both banks has caused worry that Signet could vanish, and some insiders have speculated that “crypto’s banking rails have been effectively shuttered in less than a week.

In Conclusion…

The reports provide valuable lessons for other financial institutions. Banks should pay attention to the speed of regulatory response, concerns associated with rapid growth, and the importance of capital and liquidity. It is essential to take corrective actions promptly and demonstrate to the agencies that mitigating factors are in place. Banks that take these steps are likely to be viewed favorably by the regulators.

At Global Legal Law Firm, our lawyers are familiar with the rapidly changing nature of electronic payments processing processors, and the ever changing regulations involved, with decades of expertise in ISOs, commercial collections, credit card brands, and other forms of electronic payment processing litigation. Let us guide you through this new and volatile environment, rather than attempting to navigate it on your own.