FDIC Finds Poor Management and Lack of Oversight Causes of Signature Bank Failure

The FDIC concluded that the root cause of Signature Bank's ("Signature") failure was poor management and illiquidity, exacerbated by contagion effects from Silvergate Bank's self-liquidation and Silicon Valley Bank's failure.

In a report titled FDIC’s Supervision of Signature Bank, April 28, 2023, the FDIC explained that Signature, for which it was the primary federal regulator, was closed by the New York Department of Financial Services, which named the FDIC as the receiver of Signature. The report put forth by the FDIC was the product of an internal review commissioned by FDIC Chair Martin J. Gruenberg and highlighted the factors contributing to Signature’s failure as well as the FDIC’s supervisory role.

Causes of Failure

The FDIC highlighted the following ways in which Signature could have been "more measured in its growth," could have established better risk management practices and could have been more responsive to the FDIC's supervisory concerns.

• Management Responsivity. The FDIC described Signature’s management as "reactive, rather than proactive" in addressing supervisory issuers and found executives to be "disengaged" from the examination process. The FDIC said that management prioritized growth, deposits and profits over implementing sound risk management practices. Despite concerns expressed by the FDIC regarding liquidity contingency planning, liquidity stress testing and internal controls, SVB management never fully addressed these issues which the FDIC said were a large contributing factor to the bank’s failure. Additionally, FDIC’s New York Regional Office supervisors found SVB to have several ongoing breaches in its board-approved risk metrics used to determine its risk appetite regarding liquidity.
• Rapid Growth. According to the FDIC, Signature’s 175 percent increase in total asset growth between 2017 and 2021 was due to the board and management pursuing a strategy of rapid growth. The FDIC said that between 2019 and 2021 Signature grew more rapidly than its peer banks, a growth rate of 134 percent versus the 33 percent. The FDIC reported that Signature’s primary source of growth was through uninsured deposits which the FDIC said can be an unstable source of funding for banks because of the risk of customers withdrawing their funds during times of financial market stress. Additionally, the FDIC said that Signature pursued expansion within the digital asset markets which exposed Signature to (i) greater liquidity, reputation and regulatory risks because of the market’s volatility and (ii) increased risk of bank runs and contagion, including crypto-related entities. Furthermore, the FDIC stated that management was not prepared to address these risks.

FDIC Supervision of Signature Bank

The FDIC said that in retrospect, it could have escalated supervisory actions sooner in accordance with the Division of Risk Management Supervision's forward-looking approach and been timelier in communicating examination results to Signature. Specifically, the FDIC provided the following evaluation of its supervisory actions with regard to Signature:

• Examination Activities and Ratings. The FDIC reported that the FDIC New York Regional Office ("NYRO"), which conducted exams of Signature, rated Signature’s board and management performance as "satisfactory" until March 11, 2023. However, the FDIC stated that it "would have been prudent" to downgrade the management component of the exam to "needs improvement," given the recurring liquidity control weaknesses, Signature’s unrestrained growth and management’s slow response to address findings. The FDIC said that the NYRO did conduct a number of target reviews identifying recurring liquidity risk management and made multiple supervisory recommendations. The FDIC found, however, that management’s responsiveness and effectiveness in addressing the recommendations was "mixed."
• Timeliness and Communication. The FDIC stated that its communication with Signature regarding exam results was "often not timely" and that target review supervisory letters and annual roll-up reports of examination ("ROEs") frequently exceeded the elapsed-day benchmarks. The FDIC reported at least one instance where a current-year targeted review was withheld until the prior year annual roll-up ROE was released. In a "lessons learned review" the FDIC said that the NYRO identified multiple opportunities when its examiners could have engaged more with bank management.
• Examination Team Resource Challenges. The FDIC said that it experienced staff resource challenges that contributed to the lack of timeliness and quality of Signature examinations, including persistent staffing shortages within its large financial institution examiner ranks.