FDIC Says Poor Risk Management, Illiquidity Led to Failure of Signature Bank

Improper risk management helped doom crypto-friendly Signature Bank (SBNY) as it grew rapidly, the Federal Deposit Insurance Corp. (FDIC) said Friday.

Regulators shuttered Signature Bank on March 12 amid the failure of another crypto lender, Silvergate Capital, and Silicon Valley Bank. The FDIC and the Federal Reserve instituted emergency measures to pay back depositors and provide liquidity to other banks in need. SBNY's failure cost the FDIC's Deposit Insurance fund $2.5 billion, although the total loss will be known only after its FDIC receivership ends.

The FDIC noted in a report that the "primary cause" of the bank's failure was illiquidity caused by the collapse of Silvergate. However, it also said the root cause was poor management, saying its board pursued "rapid, unrestrained growth without developing and maintaining adequate risk management practices". Management also failed to adopt proper corporate governance and failed to listen to FDIC concern respond quickly to its recommendations.

The FDIC said the bank had an over-reliance on uninsured deposits and that management failed to understand the inherent risks involved with its reliance on crypto industry deposits and wasn't aware of its vulnerability to the contagion that existed from 2021 through 2022.

As of 31 Dec. 2022, SBNY had total deposits of $88.6 billion and assets of $110.4 billion. In the FDIC's conclusions, it said the speed at which depositors withdrew funds from SBNY and Silicon Valley Bank in March was "unprecedented" and may lead to changes in regulation and supervision related to liquidity risk management.