What Went Wrong for Signature Bank?

Banks are an important part of any economy. They play some vital financial functions in the concerned economic system. But they too have certain problems and are prone to devastating conditions. These can lead to bankruptcy, shutting down, and acquisition of the bank. Therefore, banks and their management need to work most appropriately and fruitfully.

Let us discuss the ups and downs as per the case of Signature Bank….

A brief account of the bank

Signature Bank, having been established in 2001, has worked for over 22 years. It has had offices in the states of New York, Connecticut, California, North Carolina, and Nevada. It also has had the status of an FDIC-insured bank. The assets at the start amount to 50 million dollars. During its 22-year run, the bank had reached from 7900th largest to 29 largest before shutting down.

In 2018, it ventured into digital banking and launched the blockchain payment platform. Their deposits will be 28.7 billion dollars by 2021. It was also included in the S&P Index in the same year. Later on, the banks shut down on March 12, 2023; which resulted in acquisition by the Flagstar Bank.

What Actually Happened?

Silicon Valley Bank or SVB receives the shutdown from the California Department of Financial Protection and Innovation. This is due to a decrease in investment and because depositors have withdrawn their large sums along with other factors. Before the collapse, the bank had assets worth 209 billion dollars.

This majorly contributed to the fatal collapse of Signature Bank in March 2023. This follows a series of events. These events go as:

As per media reports, Signature Bank announces its intention to shed its deposits from the crypto sector to lessen its share gradually below 15. This decision is about some issues in space. This event is on December 6, 2022.

Federal Deposit Insurance:

The bank releases its annual report that states its performance above Federal Deposit Insurance Corporation or FDIC standards. The leadership has appeared as optimistic regarding their performance and future hopes. The deposit situation throughout the year appeared very difficult. The organization provided its response on January 17, 2023.

Three credit agencies i.e. Fitch, Moody’s, and Kroll have affirmed the bank’s rating. This rating is based on the reviews of its stability and risk management practices used by the bank. The bank noted this rating on January 31, 2023.

The bank sends out a press release about solid investment ratings, strong liquidity, a heightened level of capital, and a diversified financial position. This financial position and asset-related balances hint at industrial development in the press release. This possibly hints at an effort to attract and reassure investors. It stands to date on March 9, 2023.

This is where the first major pillar falls, California Department of Financial Protection and Innovation shuts Silicon Valley Bank down. This led to a heavy blow on Signature Bank’s trading and caused a 79 percent decrease on March 10, 2023, compared to standing on February 10, 2022.

New York State Department of Financial Services takes possession of the Signature Bank and appoints FDIC as the bank’s receiver. FDIC intern handovers all the deposits and assets to Signature Bridge Bank to look for potential bidders. This happened on March 12, 2023.

FDIC later announces Flagstar Bank as the acquiring institute for Signature Bank. Almost all the deposits and some loans are handed over to Flagstar Bank. While loans worth 60 billion dollars are still under FDIC’s receivership. This transfer takes place on March 19, 2023.

All these events are due to various reasons.

Why Does All This Happen?

In simple words, the fall of Silicon Valley Bank leads to the fall of Signature Bank. But there are various reasons which explain this tragedy better. Majorly these reasons are:

The large share of uninsured deposits:

According to the bank itself, deposits of 79.5 billion dollars in the bank have been uninsured. This status stands as of December 2022. The amount stands as almost 90 percent of the whole deposits at the time. Uninsured deposits lead to bank runs and in the case of both SVB and Signature Bank, this is exactly what happened.

Poor governance and lack of risk management:

As per FDIC, the signature bank has had poor governance and risk management. By the time of the collapse, the bank’s liquid asset stands at 5 percent while average liquidity needs to be 13 percent. This creates instant problems as clients tend to withdraw their money from the bank in hard cash.

Lack of FDIC reviews:

Banks are regulated through certain set standards. FDIC oversees banks and their performance to check whether the standards are met or not. Signature Bank has been greatly neglected by FDIC and as a result, the bank could not manage properly. Accounting services can be used in this regard.

Concentration in the crypto sector:

By September 2022 just 6 months before the shutdown, about 25 percent stood in crypto. After 3 months, the bank announced to decrease this to 15 percent. The bank fails to reach this objective. This too creates problems with withdrawals and eventually defuncting.

These contribute to delivering the bank’s downfall from a successful run and advancement.

Conclusion

Signature Bank, a New York-based bank collapsed in March 2023 due to a bank run and its inability to deliver to its depositors. The bank suffered a gradual tumble after December 2022 leading to a full handover in March 2023. This shutdown is due to different reasons which are discussed in the article.