US regulators shut-down another bank

With regulators seizing New York regional bank named Signature Bank (SBNY) within 48 hours of shutting down Silicon Valley Bank (SVB), American banking sector visibly is in dire trouble as one-after-another bank is collapsing in the country. Signature Bank becomes the third-largest bank to ever fail in the US, behind Silicon Valley Bank and Washington Mutual in 2008, if its assets have not changed significantly since the end of 2022.

According to media reports, Signature Bank has US$110 billion in assets as of December 31, 2022 ranking 29th among US banks. It had US$88 billion in deposits as of that date, and approximately 89.7 percent were not insured by the Federal Deposit Insurance Corporation.

Treasury Department Secretary Janet Yellen and Federal Reserve Chair Jerome Powell and FDIC Chair Martin Gruenberg said, all of those deposit holders will get their money back. They cited a “systemic risk exemption” that is also being applied to all Silicon Valley Bank deposit holders.

Shareholders and certain unsecured debt holders will not be protected, they added, and senior management had been removed. Any losses to the FDIC’s Deposit Insurance Fund to support depositors who exceeded the US$250,000-protected limit, they added, “will be recovered by a special assessment on banks, as required by law”. The FDIC maintains its insurance fund with regular contributions from banks. The government officials did not disclose how many deposits or assets Signature was left with at the time of its seizure.

Signature Bank served clients in the cryptocurrency world and had been trying to reduce its exposure. Like Silvergate Bank, another crypto-friendly bank that said last week it would voluntarily wind itself down, it suffered from a deposit outflow in the aftermath of the collapse of crypto exchange FTX. Deposits dropped 17 percent in the fourth quarter of 2022 as compared to the year-earlier period.

The value of some of its securities had also dropped in value due to a rapid rise in interest rates over the last year, a development that also created problems for Silicon Valley Bank once depositors at that California bank began withdrawing money.

Signature Bank tried last week to restore confidence in its position as investors punished regional bank stocks, releasing a filing that stated it had “a strong, well-diversified financial position” and reiterating the company’s intent to reduce its exposure to cryptocurrency customers. Its shares sold off more than 20 percent Friday, and were down 76 percent over the past year.

Signature Bank acknowledged in its most recent annual report that “our depositor base is more heavily weighted to larger uninsured deposits than many other banks” and noted that “the loss of our deposit clients or substantial reduction of our deposit balances could force us to fund our business with more expensive and less stable funding sources”.

The bank was started in 2001 by CEO Joesph DePaolo, chairman Scott Shay and vice chairman and director John Tamberlane. The bank catered to high net worth individuals. In a 2001 interview with Crain’s New York ahead of the launch, Shay described the bank’s target audience as “the guy who started his business in Brooklyn and is now worth US$20 million”. It went public in 2004.

Signature Bank became the go-to lender for Donald Trump before he became president, according to a 2018 report in the New York Times.

The bank helped to finance Donald Trump’s Florida golf course Mar-a-Lago, according to the report, and Trump’s daughter Ivanka served on Signature Bank’s board from 2011 to 2013.

Meanwhile, following closure of Signature Bank a large number of people are commenting on social media. Here are some of those comments:

Mike: Am I the only one who noticed that Signature and SVB had a common faulty exposure – crypto? and people are pointing at the Fed for the failure, while there are many banks who are not as exposed, and do not seem to be in trouble. All the fake money was going to hurt someone at some point.

Randy: Congress did this. No depository bank should be fooling with crypto. Failure to regulate rationally. You don’t let depository banks play with risky investments in a sane society. You separate out investment banks and make it clear they are on their own. Gamble freely but know if you lose there are is no bailout and your depositors and investors know it too.

Wiley Marmot: Crypto, pink unicorns, and fairy dust – none of them are real. But, only one has investors.

Robin: Senator Ted Cruz was telling everyone to please buy more crypto and don’t dare regulate it!

Rebecca: All money is fake in a way… we all agree that a little green piece of paper can buy a flashlight, a computer, a line of cocaine. We agree that a “share” in a “corporation” can be converted into something (like a house). Crypto is fake on a new level but it’s not like money is real. (I try not to think about this most of the time).

Bob: Crypto currency is a scam.

Robert: It should not make a difference if only the deposits were crypto. But if the bank itself invested in crypto for their own business, then yeah, it would matter a lot.

In the case of SVB, the problem to my understanding is not crypto itself, but that they bought a huge amount of bonds at 1 percent return or whatever. Now other banks can buy bonds with 5 percent return. So SVB cannot sell the bonds and at the billions of dollars invested in bonds, that comes out to a lot of money. The invested too much of their portfolio percentage into bonds, much more than other banks.

In addition, they did not hedge at all, which protects the bank from this exact situation. Hedging means that they should have purchased different financial instruments that go up as interest rates go up, to balance out the bonds and minimize the downside.

Also, they had no risk officer in 2022. As to why she left, probably she saw the shenanigans happening and washed her hands of the whole thing.

Glenn: Some of the banks upper echelon need to be held accountable. Need to lose everything. Too many times these people bankrupt companies and go away scot free with billions. That has to stop.

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