Three banks closed or went into receivership last week. Of the three, the one that still raises the most questions is Signature Bank (SBNY -22.87%)largely because it appeared to have enough capital and cash to survive before regulators shut it down on Sunday.
I’m not saying that the regulators shouldn’t have closed the bank, or that the bank didn’t need to be closed, just that the situation is still a bit murky.
Different from Silvergate and SVB
We know that Silvergate Capital (AND 4.53%) and Silicon Valley Bank, which was owned by SVB Financial (SIVB -60.41%)saw large deposit outflows that forced both banks to sell bonds that were massively underwater, effectively wiping out most or all of their equity.
Silvergate suggested in a regulatory filing before its closing that it was likely less than “well capitalized.” SVB had enough bond losses on its books to wipe out all of its tangible equity, which likely happened when depositors withdrew $42 billion in deposits on March 9.
We also know that at the end of 2022, Signature had tangible ordinary assets of approximately $7.3 billion. Total unrealized losses in Signature’s portfolio of available-for-sale (AFS) bonds, which are bonds the bank intends to sell before maturity, were approximately $2.5 billion. dollars. But these losses are marked to market – that is, valued at the current market price – and have therefore already been subtracted from equity. Signature also had about $762 million in unrealized losses in its portfolio of held-to-maturity (HTM) bonds, which are not marked-to-market.
So assuming Signature were to sell those two bond portfolios and take the losses, it would still have been looking at over $6.5 billion of tangible common stock. The bank also had very strong capital ratios at the end of 2022. So while that writedown would have hurt, I suspect its capital levels would still have been more than adequate.
Signature also appears to have been in a much better position from a liquidity standpoint. In fact, on March 8, the bank released updated financial statements. The bank said it has $4.54 billion in cash, loan balances of more than $6.5 billion and more than $89 billion in deposits, up since the start of 2023. In addition, the bank said it had about $29 billion in additional borrowing capacity.
This week, Bloomberg quoted an unnamed source as saying Signature outflows on Friday amounted to 20% of deposits, which would amount to nearly $18 billion. While certainly substantial, it appears the bank could have covered this amount with its cash and borrowing capacity. Even if the bank had to sell bonds, it probably could have sold its AFS book without needing to dip into the HTM book.
What the regulators said
Interestingly, Bloomberg reported on Tuesday that regulators seized Signature after it “lost confidence” in the bank.
“The bank has failed to provide reliable and consistent data, creating a significant crisis of confidence in bank management,” the New York Department of Financial Services (NYDFS) said in a statement. “The decision to take possession of the bank and turn it over to the FDIC [Federal Deposit Insurance Corp.] was based on the bank’s current status and ability to do business safely on Monday.”
Former Congressman Barney Frank, who served on Signature’s board and helped draft critical banking regulations (Dodd Frank) which was implemented in the wake of the Great Recession, said the shutdown took him by surprise.
“By Sunday morningbank executives thought they had satisfied the need for data and got capital from the discount window and elsewhere,” Frank said.
Frank also said he thinks deposit outflows stabilized on Sunday morning, but NYDFS said withdrawal requests continued to pile up through the weekend. Still, federal banking regulators only announced they would guarantee deposits on Sunday night, which appears to have stabilized the situation somewhat at other banks facing similar pressures.
Does crypto have anything to do with it?
Like Silvergate, Signature had developed a real-time payment network that crypto exchanges and institutional investors used to transact fiat dollars in real time. Silvergate and Signature came under intense scrutiny after the collapse of FTX, which had been a major Silvergate customer.
While it looked like Silvergate would face significant regulatory issues, it was more unclear whether Signature would face those same challenges. Management had bluntly stated during the bank’s last earnings call in January that it had not breached the Bank Secrecy Act (BSA) or Anti-Money Laundering (AML) rules because of its relationship. with FTX.
“With the FTX, it wasn’t about BSA/AML. Everyone thought he (Sam Bankman-Fried) was legit and he ended up being very [Bernie] Madoff style. So I don’t think anyone can say they knew that and we figured that out,” Signature CEO Joe DePaulo said. said in this call.
Signature COO Eric Howell also pointed out that although the bank had plans to add FTX to its payment network, it had not yet completed the onboarding process and therefore had no customer transactions related to it. FTX on its platform.
Yet on Tuesday evening, Bloomberg reported that Signature had been the subject of a criminal investigation related to its crypto business and whether or not the bank had done enough to identify money laundering through its payment network. But Bloomberg also said Signature has not yet been accused of wrongdoing. Additionally, when asked about it, NYDFS said Signature’s shutdown “had nothing to do with crypto.”
A different deposit base
A big part of what led to the demise of Silvergate and SVB is that each bank had too much concentration of deposits in one area. Most of Silvergate’s deposits came from crypto clients, while more than half of SVB’s deposits came from venture capital and private equity firms.
Signature was exposed to venture capital, private equity, and crypto-related deposits. And like SVB, most of its deposits were not FDIC-covered, with more than 94% of deposits exceeding $250,000. Signature has also served many high net worth clients and real estate investors who likely had the ability to move large numbers of deposits at once.
But the deposit base was even more diverse than SVB and Silvergate. By the end of 2022, only 4% of the bank’s deposits came from venture capital and private equity clients, while crypto-related deposits had fallen to 16.5% of total deposits by January.
Additionally, many believed that the Silvergate and SVB issues would end up being a net positive for Signature. A host of crypto firms including Coinbase, actually started using Signature’s payment system and transferred deposits to the bank after Silvergate was on the brink of collapse in early March. Compass Point analysts also said in a March 10 research note that they viewed the recent disruptions at Silvergate and SVB as positive for Signature.
As of this writing on Wednesday, I think a lot of questions remain about Signature’s closure. Although it appears that the bank had sufficient liquidity and capital to handle large deposit outflows, the outflows that accumulated over the weekend were perhaps insurmountable to overcome. It would have been interesting to see what might have happened had the bank remained open until Sunday evening, when federal regulators announced deposit support.
So of course, there may be some truth that crypto problems led to the bank’s demise or that regulators simply lost patience with management and its ability to get accurate information. I feel like Signature hasn’t always been the best at disclosing information, especially when it comes to its crypto business. The bank didn’t even start releasing a quarterly results slideshow until early 2022, which I always found odd for a bank of its size.
Signature’s collapse was perhaps inevitable, and the most likely scenario appears to be a deposition run of epic proportions. But what happened is far less clear than what happened at Silvergate and SVB.