Signature Bank forced to close due to deposit run and risky cryptocurrency investments


13th March 2023 – (New York) Signature Bank, a New York-based financial institution that specialixes in real estate lending and recently ventured into cryptocurrency deposits, abruptly closed its doors on Sunday. The bank’s closure came after regulators warned that keeping it open could pose a threat to the entire financial system’s stability.

The panic surrounding the recent seizure of Silicon Valley Bank by regulators is partly to blame for Signature’s demise. This event highlights the challenges that smaller banks face, particularly those that focus on niche lines of business and have a smaller customer base than larger institutions such as JPMorgan Chase or Bank of America. This makes them more vulnerable to traditional bank runs.

Silicon Valley Bank, which primarily lends to startups, collapsed after making some untimely financial decisions, causing it to struggle to meet customer withdrawal requests. Meanwhile, slowing venture capital funding led fledgling companies to tap their accounts, exacerbating the situation. Signature Bank, similarly, welcomed cryptocurrency deposits just before the overheated industry crashed last year.

As news of Silicon Valley Bank’s troubles spread last week, Signature’s business customers began calling the bank, concerned about the safety of their deposits. Many worried that their deposits could be at risk because, like Silicon Valley’s business customers, most had more than $250,000 in their accounts. However, regulators announced on Sunday that customers of both banks would be reimbursed, regardless of how much they held in their accounts.

The sudden and substantial withdrawals from Signature’s accounts led to a severe strain on the bank’s liquidity, and its stock price, along with that of some of its peers, plummeted. Despite the outflows slowing down by Sunday morning, the bank’s leaders were still shocked when regulators informed them that they were seizing the bank, which had 40 branches nationwide, and removing its executive team.

Signature Bank had assets of less than $100 billion and was a significant player in the banking services sector, specializing in escrow accounts for holding client money and other services for law firms and real estate companies. It also catered to wealthy families in the New York area, and its clients included some individuals associated with the Trump Organization, such as Jared Kushner and Charles Kushner. The bank also helped finance Donald Trump’s Florida golf course.

Regulatory filings show that more than $79 billion, or close to nine-tenths, of Signature Bank’s roughly $88 billion in deposits were uninsured at the end of last year. As of last week, the bank stated that over 80% of its deposits were from law firms, accounting firms, healthcare companies, manufacturers, and real estate management companies. The bank also reported that its digital asset-related client deposits amounted to $16.52 billion, making it one of the few financial institutions that welcomed crypto asset deposits.

In 2018, Signature Bank made the decision to venture into the cryptocurrency industry, which ultimately proved to be a fateful one. The collapse of FTX and ensuing criminal investigation caused the value of crypto assets to plummet, leading to the voluntary closure of another cryptocurrency-focused bank, Silvergate Bank.

According to Christopher Whalen of Whalen Global Advisors, Signature Bank’s downfall had more to do with the bank’s foray into the crypto industry than with any other factor. He characterized it as a “huge error in judgment by veteran bankers” that led to a deposit run and the bank’s closure.