On Sunday, March 12, Signature Bank, the 29th largest financial institution in the United States and one of the most prominent crypto-focused banks, was shut down by regulators.
Signature Bank became the third major bank to wind up operations this year after Silicon Valley Bank and Silvergate Bank announced liquidation the past week. The New York State Department for Financial Services (NYDFS) has taken possession of the bank’s assets.
Regulator’s Seize Signature Bank’s Assets
As of December 31, 2022, Signature Bank had assets worth approximately $110.36 billion and total deposits of $88.59 billion. The institution was the leading banking partner for many crypto companies, including crypto exchange Coinbase, Binance, Kraken, and stablecoin issuers Paxos.
According to a statement by Superindentent Adrienne A. Harris of the NYDFS, the state regulatory body has taken control of the bank’s assets under Section 606 of New York Banking Law and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver to protect customers’ deposits. The FDIC will liquidate Signature Bank’s assets to settle depositors.
The decision to cease the bank’s operations was taken after discussions with the Federal Reserve, FDIC, and the U.S. Treasury Department.
All depositors of the institution “will be made whole”, read a joint statement issued by Treasury Secretary Janet Yellen, Fed Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg. Authorities have also removed the bank’s senior management.
U.S. Government’s Plan To Bailout The Bank
This comes two days after the Department of Financial Protection and Innovation (DFPI) seized California-based startup incubator Silicon Valley Bank and placed it under the FDIC’s receivership. The bank of choice of more than half of America’s tech startups suffered a bank run on Friday after it reported losses of over $1 billion from a sale of its assets to continue operations.
The Santa Clara headquartered bank, which had assets worth $209 billion under management, collapsed after depositors initiated withdrawals of $42 billion, draining a quarter of the bank’s $175.4 billion deposits in hours.
The FDIC insured fund deposits of up to $250,000 and promised to give insured and uninsured depositors complete access to their funds starting March 13, 2023.
Uninsured depositors, who make up over 90% of Silicon Valley Bank’s customers, will be paid an advanced dividend and will get the remaining amount once the FDIC completes the sale of its assets.
The regulators’ quick action was a measure to reduce spillover effects from depositor outflows affecting other financial institutions in the country, which may lead to a banking crisis. The Fed, FDIC, and the Treasury have promised that no taxpayer will bourne the cost of losses made by both banks.
However, the authorities made clear that creditors and equity holders of SVB and Signature Bank will not be protected under the bailout program. Furthermore, any losses to the Deposit Insurance Fund to support uninsured depositors that exceed the $250,000 limit “will be recovered by a special assessment on the banks, as required by law.”
Additionally, the Federal Reserve and the Treasury Department have made available $25 billion to financial institutions under the new Bank Term Funding Program (BTFP).
The fund will offer depository institutions, like banks, savings associations, and credit unions, loans of up to one year in exchange for promising assets such as treasury bonds, agency debt, and mortgage-backed securities (MBS) as collateral.
The BTFP will serve as an additional source of liquidity for the banks, eliminating the need for them to sell their assets at a loss when under financial distress.
Signature Bank served clients from both traditional finance and the cryptocurrency sector. Like its rival Silvergate Capital, the bank offered a blockchain-based payments network called SigNet that allowed its clients to exchange funds throughout the year, even outside regular banking hours.
Silvergate’s SEN and Signature’s SigNet were used by customers of major crypto exchanges to cash out their deposits in U.S. dollars. Both networks have since shut down.
Silvergate’s Withdrawal From The Crypto Sector And Its Exposure
However, Silvergate’s $8 billion bank run following its exposure to collapsed crypto exchange FTX and subsequent losses from selling its assets to fund operations forced Signature to diversify its portfolio away from the crypto industry.
Recently the bank has been limiting its crypto partnerships, with its latest SEC filing showing that only 25% of client deposits were crypto-related.
A host of crypto companies have confirmed their exposure to the collapsed bank. Stablecoin issuer Paxos Trust Co. declared that it holds $250 million in cash balance and private insurance at Signature Bank, which is more than the FDIC’s $250,000 insured limit.
U.S.-based cryptocurrency exchange Coinbase revealed it has approximately $240 million in “corporate cash” in the troubled bank. The world’s second-largest crypto broker expects to fully recover the funds in the coming days.
Signature Bank was also the banking partner of crypto exchanges Binance and Kraken, which are yet to disclose their exposure to the bank. Last month, both platforms were asked to limit their SWIFT transfers via SigNet to customers with balances over $100,000.
Circle, the issuer of USDC stablecoin, was the most affected by the collapse of Silicon Valley Bank. Last week, the company revealed it has $3.3 billion in USDC reserves deposited in the bank, which resulted in investors rushing to cash out on USDC and the token losing its dollar peg, trading as low as $0.87 on Saturday.
The second-largest stablecoin by market cap and one of the most traded cryptocurrencies bounced back to its $1 constant right after the Federal Reserve announced it will be bailing out the bank.
The U.S. Treasury Department and the Federal Reserve stated that the country’s banking system remains “resilient” and on a “solid foundation” due to the reforms made after the 2008 financial crisis to safeguard depositors.
The collapse of Signature Bank and Silicon Valley Bank is the largest in U.S. history since the closure of Washington Mutual at the height of the 2008 crisis.
Fearing a market collapse, many crypto investors moved their holdings from stable assets and alt-coins to Bitcoin (BTC) and Ethereum (ETH), increasing the assets’ value.
At the time of writing, BTC is trading at $22,283 – up by over 9% in the last 24 hours. Meanwhile, ETH is trading at $1,604 – up 9.7% since the Fed’s announcement.