Signature Bank was shut down on March 12, 2023, after depositors withdrew large sums of money on the heels of the collapse of Silicon Valley Bank (SVB). Regulators feared continued contagion in the banking sector and closed Signature Bank to try to contain the panic.
Bank failures aren’t new. More than 550 banks shut down from 2001 to so far in 2023, according to the Federal Deposit Insurance Corp. (FDIC). But Signature’s breakdown stands out because of its connection to the SVB failure and ensuing fears about the health of the banking sector as a whole. At the time, SVB was the biggest bank failure—and Signature the second biggest—since Washington Mutual closed in 2008. (Those collapses have since been eclipsed by the failure of First Republic Bank in April 2023.)
The 2023 failures prompted a controversial rescue that called into question FDIC limits and which banks are “too big to fail.” To learn more, we’ll delve into Signature’s history, the events that led up to its demise, and how it impacts you—and the broader economy.
Key Takeaways
- Signature Bank was shut down by federal regulators on March 12, 2023.
- The bank’s failure resulted from regulator concern about depositors withdrawing large amounts of money after the failure of Silicon Valley Bank (SVB) and the fear of continued contagion.
- Federal regulators said Signature Bank customers would get all deposits back, even amounts over $250,000 that are uninsured by the Federal Deposit Insurance Corp. (FDIC).
- An April 2023 FDIC report blamed Signature’s failure on bank mismanagement, a lack of corporate governance, and failure to listen to and respond quickly to the FDIC’s recommendations.
- Signature Bank’s failure raised many policy questions around FDIC insurance, and bank and cryptocurrency oversight.
What Was Signature Bank?
Signature Bank functioned as an FDIC-insured, New York state-chartered commercial bank, primarily working with privately owned businesses. Signature Bank had clients in middle-market companies but was especially known for catering to law offices, real estate buyers, and cryptocurrency companies. The bank had 40 private client offices across metropolitan New York, Connecticut, California, Nevada, and North Carolina.
Signature Bank was listed as the 19th largest bank in the United States by S&P Global, with assets worth $110.36 billion and $88.59 billion in deposits in December 2022. It was a powerhouse in New York real estate lending, as the third-largest commercial real estate bank in New York City, primarily working multifamily housing loans, according to real estate data analysis publisher PincusCo.
Notably, Signature Bank was also the first FDIC-insured bank to create a blockchain-based digital payments platform approved by the New York State Department of Financial Services (DFS). Its platform, Signet, required a minimum account balance of $250,000; FDIC insurance caps out at $250,000.
History of Signature Bank
New York City-headquartered Signature Bank began in 2001 with $50 million in assets and “ranked somewhere around the 7,900th-largest U.S.-based commercial bank, based on deposits,” according to a statement by Chairman of the Board Scott Shay. By 2023, Signature Bank had grown to become the 29th largest U.S.-based commercial bank.
Shay co-founded Signature Bank alongside Joseph J. DePaolo and John Tamberlane. The bank’s model relied on a network of private client banking teams. Veteran bankers acted as a single point of contact for all client needs.
Note
Somewhat ironically, former U.S. Congressman Barney Frank became a member of Signature Bank’s board of directors in 2015. The Democrat co-authored the Dodd-Frank Wall Street Reform and Consumer Protection Act after the 2008 financial crisis, which aimed to reduce risk and increase bank oversight.
The bank continued to expand and by 2018 had ventured into digital banking, eventually launching its blockchain payments platform in 2019. In 2019, Signature Bank opened a flagship private client banking office in San Francisco, then continued to grow throughout California. Total digital-related deposits reached $28.7 billion by the end of 2021—almost 30% of the bank’s deposit portfolio.
By 2021, Signature Bank was added to the S&P 500 Index; the bank’s shareholder return ranked top among all financial institutions in the index.
Signature Bank affirmed a commitment to creating positive social impact, including diversity awareness events and time donated to charitable causes. The bank also matched client funds for the Impact Certificate of Deposit (CD) Program supporting sustainable development initiatives.
However, housing activists such as New York’s Association for Neighborhood & Housing Development (ANHD) have long alleged that Signature Bank lent “to landlords with public records of tenant harassment and poor conditions.”
Why Did Signature Bank Fail?
In short, the failure of Silicon Valley Bank led to a Signature bank run on Friday, March 10, 2023. Depositors panicked after SVB failed because Signature had high amounts of uninsured deposits and was exposed to the crypto sector.
New York state and U.S. federal regulators were also concerned—with 24/7 online banking, plus social media, the run was continuing over the weekend. On Sunday, March 12, 2023, the New York State DFS took possession of the bank “in order to protect depositors” and named the FDIC as receiver. They announced that there was a plan to make sure all depositors were protected, even those with uninsured deposits.
In late April, the FDIC issued a report on Signature Bank’s failure, concluding that the root cause was “poor management,” namely:
- Management failure to understand the risks of its concentration in the crypto sector: See the “What Did Crypto Have to Do with It?” section later in this article.
- An abnormally large share of uninsured deposits: Signature Bank reported $79.5 billion in estimated uninsured deposits as of December 2022—meaning about 90% of all its deposits were uninsured. A Congressional Research Service report on the SVB and Signature failures noted that uninsured deposits can lead to widespread bank runs—as uninsured depositors try to avoid losses by withdrawing funds before the money’s gone.
- Liquidity risk: The FDIC said the bank’s poor governance and risk management made the bank unable to manage its liquidity in a time of stress. Although Signature had enough reserves to comply with regulatory requirements, as Vidhura S. Tennekoon, assistant professor of economics at Indiana University, pointed out, only about 5% of its assets were in cash, compared to an industry average of 13%.
- Lack of adequate FDIC oversight: The report admitted to the FDIC’s own shortcomings in conducting certain timely reviews of Signature Bank, blaming a staffing shortage. But it also said the bank didn’t respond quickly to concerns and recommendations it did make.
A Timeline of the Collapse
- Dec. 6, 2022: Media reports said Signature Bank announced at a Goldman Sachs conference that it intended to shed $8 billion to $10 billion of its deposits from the crypto sector because of “issues” in the space, lowering its percentage of total deposits from 23.5% to under 20% and potentially under 15% eventually.
- Jan. 17, 2023: Signature Bank’s year-end report said the bank had remained “significantly above FDIC ‘well capitalized’ standards.” Yet the report also noted that the past year “resulted in the most difficult deposit environment we have seen in our 22-year history.” Leadership was optimistic. “On the heels of every challenge, Signature Bank emerged stronger, which will be the case this time as well,” Scott A. Shay, Chairman of the Board, said in the report.
- Jan. 31, 2023: Signature Bank noted that three credit agencies, Fitch, Kroll, and Moody’s, had affirmed its credit ratings, based on reviews “of its financial stability as well as its business and risk management practices.”
- March 9, 2023: Perhaps seeking to reassure investors and regulators, Signature Bank sent out a press release noting solid investment ratings, strong liquidity, a high level of capital, and a diversified deposit mix. Signature Bank reiterated “its strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments.”
- March 10, 2023: Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation. Signature Bank’s stock price closed at $70 on heavy trading, a drop of 79% from Feb. 10, 2022.
- March 12, 2023: New York DFS took possession of Signature Bank to protect depositors and appointed the FDIC as the bank’s receiver. The FDIC in turn transferred all the deposits and nearly all of the assets to Signature Bridge Bank, a full-service bank operated by the FDIC, while it looked for potential bidders for Signature Bank.
- March 19, 2023: The FDIC announced Flagstar Bank, a wholly owned subsidiary of New York Community Bancorp, as Signature Bank’s acquiring institution for almost all deposits and some loan portfolios. Around $60 billion in loans remained in the FDIC receivership, and the FDIC said it would cover about $4 billion in deposits related to digital banking assets.
Making Signature Bank Depositors Whole
“All depositors of this institution will be made whole,” noted a March 12, 2023, joint statement from Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin Gruenberg. The financing was to be made available through a newly created Bank Term Funding Program (BTFP), offering loans of up to one year to depository institutions.
Any bank depositors using Signature Bridge Bank automatically became depositors of Flagstar Bank and could recover funds over the $250,000 FDIC insured-deposit limit. But depositors using Signature’s digital-assets banking business will work with the FDIC to recover deposits. Shareholders and certain unsecured debtholders will not be “made whole” and will not recover their investments.
Important
In guaranteeing most of the uninsured deposits, the FDIC invoked a systemic risk exception to least-cost resolution, essentially saying that the risk of contagion to the banking sector and the economy as a whole was large enough to justify the cost of the rescue.
Who Paid for the Rescue?
The FDIC estimated the cost of Signature Bank’s failure to the Deposit Insurance Fund at around $2.5 billion. The Deposit Insurance Fund is the private insurer that guarantees deposits at FDIC-insured institutions.
Concerns abounded that the rescue would be similar to unpopular taxpayer-funded bailouts of savings and loan entities in the mid-1980s and the 2008 bailouts to stabilize large banks. But regulators said that instead, the banking industry would pay for the rescue and taxpayers would not foot any of the bill.
However, this doesn’t mean that regular people won’t end up paying in at least some way. The FDIC has said that if the Deposit Insurance Fund loses money because of the support it’s giving uninsured depositors, U.S. banks will pay a special assessment or fee.
Those fees could eventually impact you in the form of higher fees or lower interest rates on deposits—what U.S. Sen. James Lankford, R-Okla., called a “backdoor tax increase.”
What Did Cryptocurrency Have to Do with It?
Signature Bank embraced the cryptocurrency industry just before the market’s implosion with the failure of FTX in 2022. By September 2022, nearly a quarter of its deposits were from crypto clients, including the crypto exchange Coinbase Global and USDC issuer Circle Internet Financial Ltd. But Signature announced in December 2022 that it would lower those deposits by $8 billion, and it reportedly had shed $1.3 billion in funds from crypto platforms in the first two months of 2023.
That may not have been enough for depositors who were leaving banks with strong crypto ties, such as SVB and Silvergate Capital. According to news reports, Signature clients from other sectors got nervous when SVB failed, and they pulled out.
Regulators never mentioned Signature’s crypto ties when closing the bank. But former Congressman Frank—who, as noted above, was a director at Signature—said he saw the closure as an anti-crypto message by regulators. He told multiple media outlets that the bank was not insolvent and he thought regulators took it over to serve as a warning for U.S. banks to avoid cryptocurrency dealings. New York regulators denied that cryptocurrency was the concern, instead citing a lack of confidence in bank leadership.
Bloomberg reported on March 14, 2023, that before the collapse, federal prosecutors and the Securities and Exchange Commission (SEC) were investigating Signature Bank’s cryptocurrency business, particularly regarding money laundering.
The SEC didn’t directly comment on that report. On March 12, 2023, SEC Chair Gary Gensler had made a general statement about market stability.
“Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws,” he said.
What is the Bank Term Funding Program (BTFP)?
The Bank Term Funding Program (BTFP) was created in response to the collapses of Silicon Valley Bank and Signature Bank. This program makes more funding available to banks, credit unions, and other depository institutions, ensuring plentiful cash is on hand if a bank rush occurs. The program gives financial institutions loans of up to one year to bolster the banking system’s capacity. It went into effect on March 12, 2023, and will be in effect until at least March 11, 2024.
Who owns Signature Bank?
Most of the bank’s assets are owned by Flagstar Bank, a subsidiary of New York Community Bancorp. The rest are owned by Signature Bridge Bank, N.A., which was created by the Federal Deposit Insurance Corp. (FDIC) after the New York State Department of Financial Services (DFS) appointed the FDIC as receiver. A bridge bank “bridges” the time between when a bank fails and when it can be bought or liquidated. With a board appointed by the FDIC, the bridge bank assumes a failed bank’s deposits and other liabilities and purchases certain assets.
On March 19, 2023, a portion of Signature Bridge Bank, N.A.’s loans and deposits were taken over by Flagstar Bank, but $60 billion in loans and $4 billion of digital assets banking deposits remained with Signature Bridge Bank, N.A.
What is systemic risk?
The FDIC controversially used a “systemic risk exception” for Signature Bank to make all deposits available to customers—even those beyond the FDIC-insured $250,000 limit. Typically, this exception is invoked to avoid “serious adverse effects on economic conditions or financial stability,” or a risk to the banking or financial system.
Using this exception allowed the FDIC to avoid finding the “least-cost resolution.” The least-cost resolution means the one that would cost the FDIC and taxpayers the least. In most banking situations, it would only allow the FDIC to protect deposits up to the $250,000 limit.
The Bottom Line
Signature Bank was the third-largest bank failure in U.S. history and came directly after the collapse of Silicon Valley Bank (SVB). As with SVB, its collapse is partly attributed to fears about a high percentage of uninsured deposits. Depositors were also reportedly concerned about Signature’s high concentration of deposits from cryptocurrency companies amid the crypto market implosion in 2022.
The failures of both SVB and Signature Bank caused fears that panic would spread to the rest of the banking sector and prompted regulators to set up a system to make sure that depositors got the money they had in these institutions, even for amounts way larger than the usual $250,000 FDIC limit.
Although that action is considered to have halted the widespread contagion of bank runs throughout the industry, it also sparked questions about which banks should be considered too big to fail and which depositors should be considered too important to go uninsured.
