NYC-based Signature Bank fails, and banking regulators invoke ‘systemic risk exception’ for all depositors being made whole

Federal regulators swept the lender into receivership just days after the demise of fellow crypto-friendly bank Silvergate Capital Corp. and SVB Financial Group’s Silicon Valley Bank. The announcement coincided with a slate of measures out of Washington, including the Federal Reserve’s creation of a new lending program for banks, aimed at ensuring they can meet any customer requests to withdraw money.

Both Signature’s insured and uninsured customers will be able to access all their deposits under the same “systemic risk exception” that will give Silicon Valley Bank customers access to their cash starting Monday, regulators said.

The decision to close Signature came as a surprise to its managers, who found out shortly before the public announcement, according to a person familiar with the matter. The bank faced a torrent of deposit outflows on Friday, but the situation had stabilized by Sunday, the person said, asking not to be identified discussing a private matter.

“I think that if we’d been allowed to open tomorrow, that we could’ve continued — we have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit,” said former Congressman Barney Frank, a Signature Bank board member known for the Dodd-Frank Act, which overhauled US financial regulation in the wake of the global financial crisis. “I think the bank could’ve been a going concern.”

A Signature Bank representative declined to comment.

‘Singled Out’

The Federal Insurance Deposit Corp. said it transferred all Signature Bank deposits and substantially all of the firm’s assets to Signature Bridge Bank NA, a full-service bank that will be operated by the FDIC, as it markets the institution to potential bidders. 

An auction for the bank could begin as soon as Monday, a person familiar with the matter said. A representative for the FDIC didn’t have an immediate comment.

Frank said the price fetched in a sale will demonstrate the strength of the bank. 

“I understand the deposit outflow,” he said. “But I think it was a classic case of being illiquid but not insolvent, and being illiquid for exogenous reasons that would’ve been corrected.”

Much like Silicon Valley Bank, with clients made up almost entirely of businesses, Signature had a deposit base that was mostly uninsured — roughly 90% of deposits for Signature, and north of 93% of domestic deposits at SVB. That may have attracted the attention of regulators looking into banks with large uninsured deposit bases. 

“What happened at Silvergate and SVB was a very traditional bank failure,” said J. Austin Campbell, an adjunct professor of Columbia Business School. “This, unless there was a bigger run on deposits than we know about, is less so. If there’s not some pretty gory details that came out after about the balance sheet, it’s hard to figure out why they were singled out.”

Less Diversified

The bank’s assets were also less diversified than those of some of its peers, the person familiar said. That likely made managing the past year’s aggressive interest rate hikes — which erode the value of bonds — more difficult. 

Signature Bank’s collapse may cause serious problems for one corner of the tech industry: the crypto sector. Coinbase Global Inc., the US’s biggest crypto exchange, said that it had a $240 million balance at the bank as of Friday night. Paxos Global said it had $250 million there, and that it “holds private deposit insurance well in excess of our cash balance and FDIC per-account limits.”

“Crypto is almost completely shut out of US banking now,” said Nisa Amoils, managing partner at A100x Ventures.

Signature is the second crypto-friendly bank to fail in less than a week. On Wednesday, Silvergate announced plans to wind down operations and liquidate its bank amid scrutiny from regulators and a criminal investigation by the Justice Department’s fraud unit into dealings with Sam Bankman-Fried’s fallen crypto giants FTX and Alameda Research. The seizure of Silicon Valley Bank came less than two days later. 

After the shutdown of Silvergate’s SEN network in early March, Signature Bank’s Signet — a payment network that allowed commercial crypto clients to make real-time payments in dollars at any time, seven days a week — was the only game in town for many crypto customers when it came to quickly sending payments to exchanges and vendors, or meeting payroll. LedgerX, a crypto derivatives platform, earlier instructed clients to send domestic wire transfers to Signature instead of Silvergate.

If Signet goes out of commission, users may have trouble getting rapidly in and out of exchanges, dramatically impacting crypto-market liquidity. Haseeb Qureshi, managing partner at crypto venture-capital firm Dragonfly, said that the loss of Silvergate and Signature has left his portfolio companies concerned — especially those that deal in centralized finance.

‘Only Two’

“The biggest thing about Silvergate and Signature was that they were the only two banks that really had the global 24/7 settlement systems,” he said.

US regulators were racing against the clock to find solutions for failed Silicon Valley Bank and stop a potential contagion from spreading to other lenders. Treasury Secretary Janet Yellen said Sunday that she approved a resolution for Silicon Valley Bank “that fully protects all depositors” — a move that also applies to Signature Bank customers.

Signature had total assets of about $110.36 billion and total deposits of roughly $88.59 billion as of Dec. 31, state regulators said in a statement announcing they were taking possession of the bank. Signature Bank had 40 branches in New York, California, Connecticut, North Carolina and Nevada, according to the FDIC.

Digital Distancing

Outside of Signet, Signature had begun a pullback from digital assets in the wake of the blowup of FTX late last year, but still had $16.5 billion in crypto-related client deposits as of March 8.

“As a reminder, Signature Bank does not invest in, does not trade, does not hold, does not custody and does not lend against or make loans collateralized by digital assets,” Chief Executive Officer Joseph J. DePaolo said in a statement the day after Silvergate’s announcement.

FTX had accounts with Signature Bank, which the company said represented less than 0.1% of its overall deposits. In December, after FTX’s collapse, Signature said it planned to shed as much as $10 billion in deposits from digital-asset clients. That would bring crypto-related deposits to around 15% to 20% of its total, and the bank said it would cap the share of deposits from any single digital-asset client.

“If crypto companies do have to find other banking relationships, they will run right into derisking issues already a significant concern for the industry,” said Sheila Warren, CEO of the Crypto Council for Innovation. “We all have seen the passive discouragement of banks by regulators from banking crypto companies.”

Less than a month ago, Signature Bank announced that Chief Operating Officer Eric Howell would replace DePaolo, who was moving into a newly created advisory role. Howell became president on March 1 and was going to become CEO as well once DePaolo completed the transition to his new role this year.

–With assistance from Olga Kharif, Hannah Miller, Allyson Versprille, Katanga Johnson and David Scheer.