Why regulators seized Signature Bank in third-biggest bank failure in U.S. history

On Friday, Signature Bank clients spooked by the sudden collapse of Silicon Valley Bank withdrew greater than $10 billion in deposits, a board member advised CNBC.

That run on deposits shortly led to the third-largest financial institution failure in U.S. historical past. Regulators introduced late Sunday that Signature was being taken over to guard its depositors and the steadiness of the U.S. monetary system.

The sudden transfer shocked executives of Signature Bank, a New York-based establishment with deep ties to the true property and authorized industries, mentioned board member and former U.S. Rep. Barney Frank. Signature had 40 branches, belongings of $110.36 billion and deposits of $88.59 billion on the finish of 2022, in keeping with a regulatory submitting.

“We had no indication of problems until we got a deposit run late Friday, which was purely contagion from SVB,” Frank advised CNBC in a cellphone interview.

Problems for U.S. banks with publicity to the frothiest asset courses of the Covid pandemic — crypto and tech startups — boiled over final week with the wind down of crypto-centric Silvergate Bank. While that agency’s demise had been lengthy anticipated, it helped ignite a panic about banks with excessive ranges of uninsured deposits. Venture capital traders and founders drained their Silicon Valley Bank accounts Thursday, resulting in its seizure by noon Friday.

That led to stress on Signature, First Republic and different names late final week on fears that uninsured deposits may very well be locked up or lose worth, both of which may very well be deadly to startups.  

Signature Bank was based in 2001 as a extra business-friendly various to the large banks. It expanded to the West Coast after which opened itself to the crypto business in 2018, which helped turbocharge deposit progress in recent times. The financial institution created a 24/7 funds community for crypto shoppers and had $16.5 billion in deposits from digital-asset-related clients.

But as waves of concern unfold late final week, Signature clients moved deposits to greater banks together with JPMorgan Chase and Citigroup, Frank mentioned.

According to Frank, Signature executives explored “all avenues” to shore up its scenario, together with discovering extra capital and gauging curiosity from potential acquirers. The deposit exodus had slowed by Sunday, he mentioned, and executives believed they’d stabilized the scenario.

Instead, Signature’s high managers have been summarily eliminated and the financial institution was shuttered Sunday. Regulators at the moment are conducting a gross sales course of for the financial institution, whereas guaranteeing that clients may have entry to deposits and repair will proceed uninterrupted.

The transfer raised some eyebrows amongst observers. In the identical Sunday announcement that recognized SVB and Signature Bank as dangers to monetary stability, regulators introduced new amenities to shore up confidence within the nation’s different banks.

Another financial institution that had been underneath stress in current days, First Republic declared that it had greater than $70 billion in untapped funding from the Federal Reserve and JPMorgan Chase.

For his half, Frank, who helped draft the landmark Dodd-Frank Act after the 2008 monetary disaster, mentioned there was “no real objective reason” that Signature needed to be seized.

“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” Frank mentioned. “We became the poster boy because there was no insolvency based on the fundamentals.”