Signature Bank’s reliance on the crypto industry has been identified as one of the primary reasons why the bank failed. This revelation was made by the Federal Deposit Insurance Corporation (FDIC) in a report that was released in December 2021. The report outlined the reasons for the bank’s failure and recommended ways to prevent such a situation from happening again in the future.
Signature Bank, which was founded in 2007, was a small community bank based in Windsor, Vermont. The bank was heavily invested in the crypto industry, which accounted for a significant portion of its loan portfolio. The bank had lent money to several crypto companies, and it also held significant amounts of cryptocurrency on its balance sheet.
According to the FDIC report, the bank’s reliance on the crypto industry was a major contributing factor to its failure. The report noted that the bank did not adequately assess the risks associated with its exposure to the crypto industry. The bank’s management team did not have sufficient expertise or experience in this area, which led to the bank’s inability to manage its exposure to the crypto industry effectively.
Moreover, the report also noted that the bank lacked sufficient controls and risk management practices that could have helped it mitigate the risks associated with its exposure to the crypto industry. The bank did not have adequate policies and procedures in place to assess the creditworthiness of its crypto borrowers, nor did it have adequate measures to monitor the performance of its crypto loans.
Another critical issue identified by the FDIC report was the bank’s lack of diversification. The report noted that the bank had a concentrated loan portfolio, with a significant portion of its loans tied to the crypto industry. This lack of diversification made the bank more vulnerable to the risks associated with the crypto industry, which ultimately led to its failure.
The FDIC report also identified several other issues that contributed to Signature Bank’s failure. These issues included poor risk management practices, inadequate capitalization, and weak internal controls. The report recommended several actions that could be taken to prevent similar bank failures in the future.
Firstly, the report recommended that banks should have sufficient expertise and experience in the areas in which they are exposed to risks. This means that banks should have specialized staff who understand the risks associated with the industry and have the skills to manage those risks effectively.
Secondly, the report recommended that banks should have adequate policies and procedures in place to assess the creditworthiness of their borrowers. Banks should also have measures in place to monitor the performance of their loans and take timely corrective action when necessary.
Thirdly, the report highlighted the importance of diversification. Banks should have a well-diversified loan portfolio that is not overly concentrated in any one industry or sector. Diversification can help banks mitigate the risks associated with a particular industry or sector.
Lastly, the report recommended that banks should have strong internal controls and risk management practices. Banks should have adequate measures in place to identify, measure, and monitor the risks associated with their activities. They should also have appropriate mechanisms to report risks and take corrective action when necessary.
In conclusion, Signature Bank’s reliance on the crypto industry has been identified as one of the primary reasons why the bank failed. The bank’s lack of expertise, inadequate risk management practices, and lack of diversification made it vulnerable to the risks associated with the crypto industry, which ultimately led to its failure. The FDIC report recommends that banks should have sufficient expertise, adequate policies and procedures, strong internal controls, and a well-diversified loan portfolio to manage their risks effectively. By implementing these recommendations, banks can avoid similar failures in the future and continue to operate in a safe and sound manner.
Signature Bank’s pursuit of “rapid, unrestrained growth” by courting deposits from the volatile crypto industry was a major factor in its failure, according to a review by the Federal Deposit Insurance Corporation (FDIC). The FDIC report found that the bank “didn’t understand the risks of its association with the crypto industry or its vulnerability to contagion from the crypto industry that occurred in late 2022 and into 2023.” Marshall Gentry, chief risk officer at the FDIC, said that Signature Bank’s reliance on clients in the digital asset space put it in a precarious position when prices of cryptocurrencies like bitcoin and ether crashed in the wake of the collapse of the crypto exchange FTX. Most of the flight was in “digital-asset related cash deposits” that were “concentrated in a very few, very large borrowers or depositors.”
Signature Bank was popular with crypto companies in part because of its blockchain-based internal digital payment platform called Signet, which the bank launched in 2019 and enabled customers to settle U.S. dollar payments globally 24 hours a day, 7 days a week. However, the bank’s association with digital asset firms proved to be its downfall, and its investors started to take notice. The bank’s reputation as a banker to many in the crypto industry saw its stock price closely tracked the tumultuous events in the crypto industry space and dropped significantly during 2022.
Despite warnings from FDIC examiners about the reputational risks associated with associating with the cryptocurrency and the risks associated with having such a large share of its deposits concentrated in one industry, bank management failed to understand quickly how its association with the crypto industry posed such reputational risks. After a flurry of negative press coverage, the bank pledged in January to limit its digital-asset industry deposits to less than 20% of total deposits and to run off between $8 billion and $12 billion in deposits from the industry over a period of months, down from 23.5% last September.
Signature Bank’s rapid growth fueled by the crypto industry was ultimately unsustainable, and the bank’s association with digital asset firms proved to be its downfall. The FDIC review highlights the risks associated with relying too heavily on any one industry and failing to understand the risks of association with that industry. The collapse of Signature Bank serves as a warning to other financial institutions that are considering pursuing rapid growth and courting clients in the volatile crypto industry. Success in this high-risk, high-reward environment requires a deep understanding of the risks and an unwavering commitment to risk management.
