The US Federal Deposit Insurance Corporation (FDIC) is attributing the sudden collapse of Signature Bank exposure to mismanagement. The regulator is alleging the failure of the regional bank arises from exposure to the digital assets’ deposit as a contributing factor.
Executives Failed to Exercise Risk Management in Signature Bank
In its Friday, April 28 report, FDIC laments that the crypto-friendly financial institution collapsed owing to mismanagement escapades traced to its executive failures. The report considers that failure to deploy sound banking practices triggered the contagion effects that downed Silvergate Bank, Silicon Valley Bank, and Signature Bank.
The FDIC report delves into investigating the contributing factor that revealed the vulnerability of Signature Bank. The source of its weakened infrastructure is the heavy reliance on uninsured deposits.
Considerable Presence of Uninsured Deposits Worsened the Vulnerability of Banks
The regulator’s report demonstrates that the considerable presence of uninsured deposits aggravated the vulnerability of Signature Bank. Essentially, the executives failed to deploy strong practices for liquidity risk management. Also, the executives relied upon inferior poor risk management in daily operations.
FDIC points out that the vulnerability of Signature Bank became apparent during the bank run prompted by the collapse of Silvergate Bank, Silicon Valley Bank, and Credit Suisse in Switzerland. The report illustrated that Signature served the crypto companies, a segment exposing the bank to significant volatility risk.
Inadequate Understanding of Crypto Meltdown Risk Led to Signature Bank Collapse
The FDIC added that Signature Bank’s leadership needed to understand the risk associated with crypto assets and reliance on deposits from crypto industry stakeholders. The inadequate understanding of the susceptibility of crypto industry turmoil through contagion meant the meltdown witnessed in late 2022 and early 2023 was overlooked.
FDIC indicates initiating the review of Signature Bank after the New York Department of Financial Services (NYDFS) took over the bank in March 2023. The NYDFS superintendent Adrienne Harris dismissed the claim that the Signature shutdown was closed for providing services to the crypto customers. Instead, Harris indicates the challenge lay elsewhere.
NYDFS Reports Echo Findings by GAO and Federal Reserve on US Banks Crisis
NYDFS preliminary review affirmed that the existence of serial mismanagement was worsened by a failure to account for the crypto-related risks. The release of the FDIC report coincided with the Federal Reserve and Government Accountability Office (GAO) conveying results on Signature and Silicon Valley Bank.
Like FDIC, the Federal Reserve attributed serial mismanagement leading to the SVB collapse, which was subsequently aggravated by the crypto links. Besides, the bank would suffer greater risk through liquidity and interest-rate hikes.
GAO observed that Signature suffered declining deposits, particularly from the crypto industry, in 2022 before the bank collapsed. GAO report linked the Signature Bank to inadequate risk management linked to the deposits. Additionally, Signature Bank’s exposure to digital assets exposed the bank’s vulnerability just as Silicon Valley Bank by the interest rate hikes.
The reports from the three authorities alleged the non-action by the regulators was the critical contributing factor. The reports acknowledge that banks’ supervisors would have acted otherwise in seeking clarity and managing risks.
Meanwhile, the US banking industry is yet out of the woods, with First Republic Bank becoming the latest casualty of the crisis. First Republic Bank shares plummeted by 75% the April, with the FDIC placing the bank under public receivership. The bank was in early Monday, May 1, a subject of bidding wars featuring several lenders such as Citizens Financial Group and PNC Financial Services Group before JPMorgan Chase took over.
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