Signature Bank (SBNY) began focusing on cryptocurrency in its final years, accepting customers from the industry in 2018. By 2021, the bank received over 16% of its deposits from the sector and held reserve monies from the Circle-managed USDC. This strategy proved risky and earned the bank the reputation of a “crypto bank”. Founder DePaolo attempted to shed this label in an interview with the Financial Times in July 2022. However, the bank began to experience outflows of deposits, evenly split between crypto clients and its New York private banking customers. Investors privately raised concerns about liquidity, as an implosion of the industry in a credit crunch could cause deposits to evaporate rapidly, given that Signature Bank represented eight of the twelve largest crypto brokers.
On March 12, 2023, banking officials in New York State closed Signature Bank due to systemic risk, following the collapse of Silicon Valley Bank (SVB), with both banks closely involved in cryptocurrency. Although all depositors are expected to be made whole, equity and bond holders may face losses.
Government Bailouts and Risk Management
The government should not bail out the uninsured deposits at Silicon Valley Bank. It should, however, take action to protect other regional banks from runs, such as by buying or lending against their long duration bonds at par. SVB’s negligence in managing its balance sheet could be attributed to the bank’s cultural insularity in the venture-backed world, which concentrated its funding source in the highest beta part of the economy – technology. While corporate depositors may not be responsible for the bank’s mismanagement, they should be expected to manage their counterparty risks.
Bailing out uninsured depositors at SVB, which are mostly corporates, would send the message that risk management is anachronistic. It would infantilize markets by absolving them of their responsibility to manage counterparty risks. Forcing uninsured depositors to take haircuts, which will likely be 10% to 20%, would reinforce the need for such risk management. It would send the message that the economy values risk management.
Government Actions to Protect Depositors
The government has taken decisive actions to protect the U.S. economy by strengthening public confidence in the banking system. Following recommendations from the FDIC and the Federal Reserve Board, and after consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank. Depositors will have access to all their money starting Monday, March 13, and no losses will be borne by taxpayers.
Similarly, all depositors of Signature Bank will be made whole, and no losses will be borne by the taxpayer. However, shareholders and certain unsecured debtholders will not be protected, and senior management has been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law. The Federal Reserve Board will make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. These actions demonstrate the government’s commitment to ensure that depositors’ savings remain safe, and the U.S. banking system remains resilient and on a solid foundation.
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