FDIC says Signature Bank failed due to mismanagement, risky crypto deposits

The U.S. Federal Deposit Insurance Corporation (FDIC) investigation into the collapse of Signature Bank found that the root cause of its troubles was “poor management” and risky crypto deposits.

The FDIC released its comprehensive report on Signature Bank and the reasons that led to its failure on April 28. The regulator’s review covered the period between Jan. 1, 2019, to March 12 — when the New York-chartered bank was seized by regulators after experiencing an $18.6 billion bank run within a matter of hours.

Risky deposits

Before its collapse, Signature Bank had $110 billion in assets under management and was the 29th largest lender in the U.S. It experienced rapid growth between 2019 and 2021 after expanding services to crypto-related companies.

However, the regulator found that the vast majority of Signature’s deposits were uninsured and prone to withdrawal if there were ever concerns about the bank failing — and that is essentially what happened when two banks considered to have a similar customer base collapsed.

“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.”

The FDIC said 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. It added that almost all of the digital asset-related deposits at the bank were uninsured.

Essentially, the lender’s “growth outpaced the development of its risk control framework.”

The report also highlighted a number of areas where the FDIC “fell short” in supervising Signature Bank and needs to improve — particularly in providing timely guidance. The regulator said this was due to a shortage in available staff.

Panic at the markets

The regulator said the “immediate cause” of the lender’s collapse was a “propulsive run on deposits” sparked by the consecutive failures at Silvergate Bank and Silicon Valley Bank (SVB) — both of which were perceived to be heavily connected to digital assets.

News of the two banks’ collapse caused panic in the market which led to a bank run that “was faster than any other bank run in his

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Author: Assad Jafri

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