FDIC Points to Management Failures in its Assessment of Signature Bank’s Downfall

On Friday, April 28, 2023, the Federal Deposit Insurance Corporation (“FDIC”) released a report titled “FDIC’s Supervision of Signature Bank” (the “Report”) providing its assessment of the failure of Signature Bank (“SBNY” or the “Bank”). While the Report acknowledges certain regulatory shortcomings by the FDIC’s Division of Risk Management Supervision and its New York Regional Office,[1] the Report maintains that “the root cause of SBNY’s failure was poor management.” In particular, SBNY’s management failed to properly develop its liquidity risk management practices and controls and failed to heed warnings from the FDIC as it pursued rapid growth through uninsured deposits and close ties to the crypto industry.

SBNY began its operations in 2001 with a focus on commercial real estate and commercial and industrial lending, but experienced rapid growth between 2017 and the end of 2021. Between 2010 and 2017, SBNY grew from $12 billion to $43 billion in assets and, after shifting its business model to focus on digital assets and other areas, the Bank’s assets ballooned to $118 billion in 2021. As SBNY’s assets grew, so did the risks from uninsured deposits, the concentration of deposits coming from a small number of depositors, and the Bank’s significant exposure to the crypto industry.

The Report suggests these risks were exacerbated by slow responses from management and weak corporate governance practices at the Bank, with decisions made by individuals and small informal groups of executive officers with a lack of clear decision-making processes, transparency, and documentation around approvals and escalation. The Report also suggests that SBNY’s executives were “dismissive of examination findings” and that management failed to adequately address repeat criticisms highlighted by FDIC examination findings. Ultimately, the Report concludes that the Bank’s risk management practices were not in line with the Bank’s complexity, risk profile, and scope of operations, especially with respect to liquidity contingency planning, liquidity stress testing, and internal controls.[2]  

According to the Report, the Bank’s failure to ensure sound risk management and the Bank’s exposure to the crypto industry left SBNY vulnerable to contagion following the collapse of the cryptocurrencies TerraUSD and Luna in May 2022 and the failure of FTX and the related hedge fund Alameda Research in November 2022. The self-liquidation of Silvergate and Silicon Valley Bank in March 2023 further magnified SBNY’s weaknesses, causing depositors to withdraw funds from the bank at a speed that “was unexpected and surprised the regulators and the banking industry.” These losses were exacerbated by SBNY’s poor liquidity risk planning,[3] and eventually caused the New York State Department of Financial Services to close SBNY and appoint the FDIC as receiver on March 12, 2023.

The Report provides an important account of the events leading to the downfall of SBNY and highlights important features of the FDIC’s examination and evaluation process. Banks may wish to consult the Report to avoid similar pitfalls when conducting self-assessments of their own liquidity and risk management programs and to ensure that they are properly apprised of the FDIC’s expectations during their own examinations.

[1] The Report points to staffing shortages at the FDIC’s Division of Risk Management and New York Regional Office that have caused delays in the FDIC’s communication with SBNY and to missed opportunities to downgrade components of the Bank’s CAMELS rating prior to the failure of the bank. 

[2] The Report includes an example from 2021 in which SBNY exceeded its 10% key risk indicator for digital asset-related deposits, and, instead of ensuring the Bank adhered to the limit, SBNY simply raised the limit to 35%.

[3] The Report highlights an example in which SBNY reduced its liquidity in 2021 and 2022 through certain capital call/subscription loans that were not eligible to be used as collateral for Discount Window lending through the Federal Reserve Bank of New York. Nonetheless, management continued trying to use these loans as collateral to obtain liquidity though Discount Window lending and continued to include them in its collateral calculations until hours before the Bank failed.