NYDFS Identifies Factors Leading to Signature Bank Failure; Recommends Improvements to Supervisory Procedures
Commentary by Steven Lofchie and Sebastian Souchet
The New York State Department of Financial Services ("NYDFS") identified the factors contributing to Signature Bank’s failure and recommended improvements to its bank supervisory procedures.
In an Internal Review, NYDFS said that the "immediate cause" of Signature Bank's failure was a run on deposits exacerbated by Silvergate Bank’s self-liquidation and then Silicon Valley Bank’s closure by the California regulators. NYDFS reported that Signature Bank experienced a 20 percent reduction in its deposit base in one day as a result of the "rapid spread of information and rumors" through social media and the speed afforded by digital banking. In order to open on Monday, March 13, NYDFS said that Signature Bank had to raise the liquidity necessary to satisfy outstanding and new withdrawal deposit amounts. NYDFS said that Signature Bank instead asserted that it would be able to pledge assets that it knew the Federal Reserve Bank of New York would "either not accept or take weeks to review."
NYDFS stated that in 2019 the FDIC downgraded Signature Bank's liquidity rating from "satisfactory" to "less than satisfactory" which was reported in a matter requiring board attention ("MRBA"). NYDFS found that Signature ultimately failed to resolve the MRBA relating to liquidity contingency planning issues. NYDFS said that Signature Bank's failure to remediate its outstanding liquidity management issues "undoubtedly" contributed to its collapse.
The NYDFS plans to update its bank supervisory procedures by, among other things:
- addressing inefficiencies in issuing examination findings to banks which were previously delayed in being delivered to Signature Bank;
- rebuilding its examination capacity and rebuilding its pool of examiners and supervisors;
- reassessing assumptions regarding (i) managing liquidity risk and (ii) bank customer behavior in the liquidity coverage ratio regulation; and
- establishing regulatory tools to hold executives accountable for misconduct that contributes to a bank’s failure.
Further, NYDFS stated that despite speculation that Signature Bank's exposure to digital assets was the reason for its failure, the percentage of digital asset customer withdrawals were proportionate to digital asset customers in Signature Bank's deposit base. The bigger issue, NYDFS said, was Signature Bank's high concentration of uninsured deposits.
Commentary
If one is looking for some ironies, it may be argued that digital assets did not crash the banking system; banking runs crashed, or contributed to the crash, of the digital asset ecosystem.
Commentary
On the whole, it appears that the NYDFS report on Signature Bank’s failure is consistent with the findings detailed in the FDIC’s report. Interestingly, NYDFS also had issues with adequate staffing, and the report notes that even while NYDFS has hired “205 new staff and promoted 199 existing members of the team . . . a long-running failure to maintain adequate staffing levels, combined with ongoing attrition requires [NYDFS] to continue [the] important work of hiring in order to fully execute on its mission” (p. 43).
Certain of NYDFS’s recommended improvements to its bank supervision are also notable. In particular, NYDFS states that:
- it will “consider whether banks need to conduct table-top exercises demonstrating their operational readiness to collect and produce accurate financial data at a rapid pace and in a stress scenario” (p. 43);
- “all regulators would do well to revisit their liquidity risk assessment frameworks to account for changes in technology, account accessibility, and customer behavior” (pp. 45-46); and
- regulators should reassess their assumptions with respect to classification of deposits and whether such assumptions “adequately capture the risks such deposits may represent” (p. 46).
Related Articles
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In a Report to the House Financial Services Committee, GAO found that poor liquidity and risk management practices were factors contributing to the failure of Silicon Valley Bank and Signature Bank. GAO said that regulators identified these risks, but failed to sufficiently address them.
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The FDIC concluded that the root cause of Signature Bank’s failure was poor management and illiquidity, exacerbated by contagion effects from Silvergate Bank's and Silicon Valley Bank's closings.
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The Federal Reserve Board concluded that the failure of Silicon Valley Bank was due to a “textbook case” of mismanagement of basic interest rate and liquidity risk, in addition to insufficient supervision from the bank’s board of directors and Federal Reserve supervisors.