The U.S. Federal Deposit Insurance Corporation (FDIC) has released a comprehensive report on the reasons that led to the collapse of Signature Bank. The investigation found that the bank’s troubles were due to “poor management” and risky crypto deposits. Signature Bank was seized by regulators in March 2021 after experiencing an $18.6 billion bank run within a matter of hours.
Before its collapse, Signature Bank was the 29th largest lender in the U.S. with $110 billion in assets under management. It had experienced rapid growth between 2019 and 2021 after expanding services to crypto-related companies. However, the vast majority of its deposits were uninsured and prone to withdrawal if there were ever concerns about the bank failing. The FDIC found that almost all of the digital asset-related deposits at the bank were uninsured.
Signature’s “reliance on uninsured deposits posed a risk that the Bank had to manage carefully to ensure adequate liquidity while maintaining a safe and sound business,” said the FDIC. However, the bank’s management did not understand the inherent risks of uninsured deposits and was not prepared for the kind of bank run that Signature experienced. Essentially, the lender’s “growth outpaced the development of its risk control framework.”
Supervision Shortcomings and Bank Run
The FDIC report also highlighted a number of areas where the regulator “fell short” in supervising Signature Bank and needs to improve, particularly in providing timely guidance. The regulator said this was due to a shortage of available staff.
The “immediate cause” of the lender’s collapse was a “propulsive run on deposits” sparked by the consecutive failures at two banks considered to have a similar customer base – Silvergate Bank and Silicon Valley Bank (SVB). The news of their collapse caused panic in the market, which led to a bank run that “was faster than any other bank run in history, save the run that had just taken place at SVB.”
Partially, the panic was caused by depositors and the media considering Signature a “crypto bank” and linking it to the crisis at the other banks. Signature’s liquidity controls were severely lacking, and it failed to meet the unprecedented withdrawal requests as it faced an almost $4 billion cash shortfall on March 10.
Regulators subsequently decided the best course of action was seizure as Signature was unable to satisfy and took over the bank on March 12.