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Signature Bank’s Crypto Execution – WSJ


Barney Frank

says regulators seized

Signature Bank

last weekend because they wanted to send a message to other banks not to do business with the crypto industry. The evidence increasingly suggests the former Congressman could be right.

New York’s Department of Financial Services took possession of Signature on Sunday after it experienced a run on deposits following the collapse of Silicon Valley Bank (SVB). Other midsize banks also experienced large deposit outflows, and Mr. Frank, who served on Signature’s board, says the bank had enough liquidity on Sunday to ride out the run.

Regulators seized Signature “to send a message to get people away from crypto,” Mr. Frank told Bloomberg Radio. “We were singled out to be the poster child for that message.” Signature doesn’t invest in, trade, hold, or make loans collateralized by digital tokens. But it does safeguard U.S. dollar deposits of crypto companies and their customers.

Crypto customers make up about 20% of Signature’s deposits, which is more than at other banks but less than at the failed Silvergate Bank. Too much exposure to any one industry can be risky (see SVB), but Signature otherwise had a diverse deposit base that included many top New York law firms and real-estate developers. Until last week, its greatest balance-sheet risk appeared to be its heavy footprint in New York real estate. Like other banks, its assets also suffered from duration risk owing to rising interest rates, which could cause losses if it had to liquidate securities to redeem deposits, as it did last week.

On Friday before its weekend closure, Signature lost $17.8 billion in deposits. But the bank had $4.54 billion in cash and $26.4 billion in “marketable liquid securities.” It also reported $25.3 billion in borrowing capacity. All this should have been enough to stay in business. Mr. Frank says bank executives on Sunday morning believed they had secured enough capital to keep operating.

The Federal Reserve’s new emergency lending facility announced Sunday night would have provided even more liquidity. But Signature was shut down before it could take advantage of this super-duper discount window.

Regulators haven’t directly disputed that the bank could have survived the run. The state’s Department of Financial Services said it took possession of the bank because it “failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership,” and “its ability to do business in a safe and sound manner on Monday.”

Does this mean regulators can seize any bank whose executives it doesn’t trust? First Republic Bank’s problems appear larger than Signature’s, yet regulators orchestrated a $30 billion deposit injection from big banks to prevent its collapse. Perhaps, as Mr. Frank suggests, regulators may have taken down Signature as part of their campaign to take down the crypto industry.

On Jan. 3, the Federal Reserve Board of Governors, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a statement that they “have significant safety and soundness concerns” about bank crypto exposure and would “closely monitor crypto-asset-related exposures.”

A few weeks later, the National Economic Council issued a policy statement discouraging banks from transacting with crypto clients. On Feb. 23, the Fed, FDIC and OCC issued another statement warning banks about potential liquidity risks from stablecoins, which are backed by hard currency reserves and are supposed to hold a fixed peg to the U.S. dollar.

Signature held reserves backing stablecoins. Regulators are ostensibly concerned that crypto customers could rush to redeem stablecoins all at once, causing a drawdown of deposits that creates a liquidity squeeze. This shouldn’t be a problem for banks with diverse deposit bases, and the risk of a deposit run isn’t unique to crypto, as we’ve seen this week.

Regulators ironically fueled the liquidity squeeze that they are ostensibly trying to prevent by spooking Signature depositors about its crypto exposure. By making crypto politically toxic, they also concentrated crypto deposits at banks like

Silvergate

and Signature.

Following the government’s Signature seizure, crypto companies say they are struggling to get other banks to take their deposits. While the FDIC is ostensibly trying to sell Signature to another bank, Reuters reports that two sources said any buyer must agree to give up all the crypto business at the bank. The FDIC denies this.

In any case, banks will be reluctant to bid for Signature owing to its legal risks, especially after a leak this week that the Justice Department has opened a criminal probe into Signature’s anti-money-laundering protections. A buyer might have to divest Signature’s crypto customers to get protection from government lawsuits and indictments.

Signature made mistakes managing its balance sheet, but it shouldn’t be summarily executed because regulators have deemed some of their customers too politically toxic to exist.

Wonder Land: How is it that the U.S. Treasury, Federal Reserve and Federal Deposit Insurance Corporation could have been spooked into a premature all-depositor bailout following hysterics on a social-media platform? Images: Shutterstock/Zuma Press Composite: Mark Kelly

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