Barney Frank says that 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 is increasingly suggesting that the former congressman may be right.
The New York 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 the firm “to send a message to steer people away from cryptocurrency,” Frank told Bloomberg Radio. “We were selected to be the poster child for that message.” Signature does not invest, trade, hold, or lend collateralized by digital tokens. But it protects the US dollar deposits of cryptocurrency companies and their clients.
Crypto clients account for 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 of New York’s leading law firms and real estate developers. Until last week, its biggest balance sheet risk appeared to be its strong footprint in New York real estate. Like other banks, its assets also suffered from duration risk due to rising interest rates, which could result in losses if it were to liquidate securities to redeem deposits, as happened last week.
On the Friday before its weekend close, Signature lost $17.8 billion in deposits. But the bank had $4.54 billion in cash and $26.4 billion in liquid marketable 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 continue operating.
The Federal Reserve’s new emergency credit line announced Sunday night would have provided even more liquidity. But Signature went out of business before I could take advantage of this super silly discount window.
Regulators have not directly questioned that the bank could have survived the run. The state Department of Financial Services said it took possession of the bank because it “failed to provide reliable and consistent data, which created a significant crisis of confidence in the bank’s leadership” and “its ability to safely and soundly conduct business on Monday .”
Does this mean that regulators can seize any bank whose executives don’t trust them? First Republic Bank’s problems seem bigger than Signature’s, but regulators orchestrated a $30 billion deposit injection from big banks to prevent their collapse. Perhaps, as Mr. Frank suggests, the regulators have removed Signature as part of their campaign to kill off the cryptocurrency industry.
On January 3, the Board of Governors of the Federal Reserve, 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 the exposure banking to cryptocurrencies and will “closely monitor exposures related to crypto assets.”
A few weeks later, the National Economic Council issued a policy statement discouraging banks from transacting with crypto clients. On February 23, the Fed, FDIC, and OCC issued another statement warning banks about the potential liquidity risks of stablecoins, which are backed by hard currency reserves and are supposed to hold a peg to the dollar. US.
Exclusive reserves backing stablecoins. Regulators are apparently concerned that crypto clients could rush to redeem stablecoins in one fell swoop, which would cause reduced deposits that would create a shortage of liquidity. This should not be a problem for banks with various deposit bases, and the risk of a deposit run is not unique to cryptocurrencies, as we have seen this week.
Regulators ironically fueled the liquidity squeeze they are apparently trying to avoid by scaring Signature depositors about their crypto exposure. By making cryptocurrency politically toxic, they also concentrated cryptocurrency deposits in banks like Silvergate and Signature.
Following the government’s seizure of signatures, crypto firms say they are fighting to get other banks to accept their deposits. While the FDIC is apparently trying to sell Signature to another bank, Reuters reports that two sources said that any buyer must agree to give up all cryptocurrency business at the bank. The FDIC denies this.
In any case, banks will be reluctant to bid on Signature because of its legal risks, especially after a leak this week that the Justice Department has opened a criminal investigation into Signature’s anti-money laundering protections. A buyer may have to ditch Signature’s crypto clients to gain protection from government lawsuits and accusations.
Signature made mistakes in managing its balance sheet, but it shouldn’t be summarily executed because regulators have deemed some of its clients politically toxic to exist.
Wonderland: How could the US Treasury, Federal Reserve and Federal Deposit Insurance Corporation have been scared into a premature bailout of all depositors after the hysteria on a social media platform ? Images: Shutterstock/Zuma Press Composition: Mark Kelly
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