Regulatory authorities in New York on Sunday decided to shut down Signature Bank, a NewYork-based banking company that supports cryptocurrency startups and investors. This is due to concerns over potential systemic risks and the possibility of a liquidity crisis. The collapse of Signature Bank comes closely after a similar shut-down of Silicon Valley Bank based in California on March 20, 2023.
According to a release by Federal Deposit Insurance Corporation (FDIC), Signature Bank had total assets of $110.4 billion and total deposits of $88.6 billion as of December 31, 2022. The collapse of Signature Bank makes it the third-largest in U.S. history.
The recent consecutive collapses and closures of major banks in the United States have raised concerns about trust among both investors and depositors. In response, the Biden Administration has announced that regulatory agencies will be conducting a thorough investigation into these incidents, and those responsible will be held accountable.
About Signature Bank
Signature Bank, co-founded in 2001 by Joseph J. DePaolo, Scott A. Shay, and John Tamberlane, was known for its banking services for high-net-worth individuals and businesses, primarily in the New York City area. The bank also had branch offices in Connecticut, California, Nevada, and North Carolina.
In 2018, Signature Bank shifted its focus to the emerging cryptocurrency industry, recognizing its growth potential. Soon after, the bank became a leading lender to the entire crypto industry, with many investors and startups in the industry taking advantage of its banking services.
Liquidity crisis and collapse
The decline and collapse of Signature bank were swift and came as a surprise to industry experts and many officials within the three banks. As a financial institution that was said to be a major lender to the crypto industry, the shutdown of multinational crypto exchange FTX has had impacts on Signature Bank. In the fourth quarter of 2022, the bank witnessed a decline in deposits by 17 percent.
Despite the impact of the FTX collapse on deposit outflows and stock price declines, Signature Bank successfully managed the situation and remained a significant player in the cryptocurrency industry. While the bank’s security may not have been flawless, its financial outlook remained stable until March 10th.
The decision of financial and banking regulators from California to shut down and start liquidation of Silicon Valley Bank triggered panic among the rest of the depositors at the Signature Bank. Depositors and investors of the bank started pulling out deposits and investments in large amounts pushing the bank to the brink of a liquidity crisis.
Barney Frank, a former U.S. congressman, has stated that customers withdrew almost $10 billion in deposits from Signature Bank following the regulatory shutdown of Silicon Valley Bank on March 10th.
Along with the liquidity crisis, shares of the bank listed on NASDAQ crashed by more than 30 percent fuelling more concerns about the operational ability of the bank.
The management of Signature Bank had time till Monday to raise additional capital or find a buyer to provide money to honor deposit withdrawals. By Sunday, it became clear that the bank has failed to reach any deals which will enable them to raise additional capital to keep the bank floating. And thus New York State Department of Financial Services decided to close the bank in a measure to protect the depositors and investors.
What happens to depositors?
According to officially available data, the bank had total deposits of 88 billion dollars at the end of 2022. Out of this 79 billion dollars of deposits were uninsured under FDIC insurance of $250,000. Despite the uninsured status of large amounts of funds, FDIC has announced that under the systemic risk exception “all depositors of the institution will be made whole. No losses will be borne by the taxpayers”.
All the deposits, assets, and liabilities of Signature Bank have been transferred to Signature Bridge Bank, N.A. Through the bridge bank, customers can get access to their funds and execute transactions online, offline, or through ATMs as normal.
All 40 branches of the bank in various states in the USA will continue to work normally from Monday onwards under the new bridge bank. FDIC specifically stated that debtors of Signature Bank will now be customers of the new bridge bank and that they should continue to repay the loans as normal.
Shareholders will not be protected
In a statement, FDIC clarified that all the top management of the bank has been removed and the shareholders and certain unsecured debt holders will not be protected against the debts.
FDIC has also facilitated systems to ensure that creditors to whom the bank owes money, can make claims against the signature bank through FDIC Claims Portal or email nondepclaimsdal@fdic.gov.
While the bridge bank resumes the operations of the financial institution, bidders can submit a bid to purchase the bank by taking up the entire assets, liabilities, and deposits.
Liquidation of Silvergate Bank
In the second week of March, another crypto banking giant Silvergate Bank based in California, United States announced that they are winding up operations and moving into liquidation as deposits went down drastically due to the closure of FTX in 2022.
The collapse of FTX was a big hit for Silvergate Bank as a large number of deposits and financial transactions of the bank were based on the crypto industry. The bank also had multi-billion dollar business with the FTX and its subsidiaries.