• FDIC Chairman Martin Gruenberg testified that Signature Bank (SBNY) failed to understand the risks of doing business with the crypto industry prior to its collapse.
• Contagion spread from the fall of Silvergate Bank and Silicon Valley Bank (SVB) contributed to Signature’s demise.
• The FDIC report on Signature Bank’s downfall concluded that their poor governance and inadequate risk management practices put them in a position where they could not manage their liquidity when faced with large withdrawal requests.
Signature Bank Collapses After Failing To Understand Risk Of Crypto Industry
FDIC Chair Testifies On Risks
U.S Federal Deposit Insurance Corporation (FDIC) chairman Martin Gruenberg recently testified before a U.S House of Representatives committee, saying that signature bank failed to comprehend the risks associated with doing business within the crypto industry prior to its collapse. He further stated that market volatility over the past two years led to contagion spreading after Silvergate Bank and Silicon Valley Bank (SVB) both fell as well.
Poor Governance & Inadequate Risk Management Practices
The FDIC report on Signature Bank’s downfall concluded that their reliance on uninsured deposits, without implementing fundamental liquidity risk management practices and controls, was part of what led to its failure. Additionally, their inability to understand the risks inherent in dealing with cryptocurrency deposits or being vulnerable to contagion from industry turmoil resulted in them not being able to meet large withdrawal requests during times of stress.
Closed By New York Department Of Financial Services
In March, The New York Department of Financial Services closed down Signature bank after customers withdrew $10 billion worth of deposits within one day. While board member Barney Frank believed it was due US regulatory crackdown on crypto, NYDFS superintendent Adrienne Harris clarified that it was solely due to liquidity issues. Flagstar Bank subsequently purchased most of Signature Banks‘ assets afterwards.
Crypto Industry Market Volatility
Gruenberg’s remarks echo those made last month by the FDIC regarding market volatility associated with crypto investments as a contributing factor in signature banks‘ collapses; highlighting the need for investors and financial institutions alike, who are dealing in cryptocurrencies, to be aware of these potential risks before investing or getting involved in such endeavors .
Conclusion
Signature Banks‘ failure serves as an example of how important it is for financial institutions dealing with cryptocurrencies or any other kind of volatile asset class,to properly assess and manage their liquidity risk ahead of time so they can mitigate losses if faced with large withdrawal requests during times of stress .
