Signature Bank failed because of “poor management,” FDIC report finds

New York (CNN) The collapse of Signature Bank was due to “poor management,” according to a Federal Deposit Insurance Corporation report released Friday.

Bank management “did not always pay attention to FDIC examiners, and was not always responsive or timely to FDIC supervisory recommendations,” the report said.

Contagion from Silicon Valley Bank’s failure and Silvergate Bank’s self-liquidation, which occurred just days before Signature Bank was forced to close, helped fuel the deposits, the FDIC report said. But the FDIC said that was not the main reason for Signature Bank̵[ads1]7;s failure.

In particular, bank management did not fully understand the risks associated with accepting crypto deposits, which accounted for more than 20% of its total deposits, the FDIC report said.

“When that industry started to turn and interest rates started to rise, those deposits started to leave the bank,” Marshall Gentry, chief risk officer at the FDIC, said on a call with reporters on Friday. “Even though they were crypto-cash deposits, it was a traditional type of bank run.”

Signature Bank had $110 billion in assets at the end of 2022, making it the 29th largest US bank. The FDIC said the bank was over-reliant on uninsured deposits, which accounted for 90% of total deposits by the end of 2022, according to FDIC quarterly banking data.

Staffing shortages at the FDIC hindered supervision of the bank

On the supervisory side, the FDIC acknowledged that it fell short in providing Signature Bank with adequate and timely reviews, citing staffing shortages at the agency.

Signature Bank was supposed to have its own investigative team through the FDIC’s New York office. But since 2020, 40% of regional office roles have been vacant or filled by temporary employees, according to the FDIC.

“Some targeted assessments were not completed on time or at all due to lack of resources,” the report said.

The high cost of living in New York, wage competition from private sector financial firms and other regulatory agencies are among the reasons the FDIC is struggling to hire new talent, the agency said.

The FDIC’s report comes on the heels of the Federal Reserve’s report, which found that SVB failed due to a similar lack of internal risk management. The report also said that regulators at the Fed “did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity.” And when they identified risks at SVB, they did not cooperate with the bank to solve the problems in time, the report found.

The FDIC led the investigation of Signature Bank, a New York state chartered bank, since it was the primary regulator. Signature Bank was not a member of the Federal Reserve System, and therefore was not directly regulated or supervised by the Fed, while SVB was.

No FDIC recommendation for stricter capital and liquidity requirements

The report noted that the speed with which depositors withdrew their money from SVB and Signature Bank was “unprecedented” and “could lead to changes in regulation,” but the FDIC made no recommendations. This is in stark contrast to the Fed’s report, which directly called for stricter capital and liquidity requirements.

Gentry, who oversaw the FDIC report, said investigators worked with Signature Bank to develop “greater internal controls over liquidity risk management.” He suggested that a separate FDIC report on Monday on options for reforming the nation’s deposit insurance system could make regulatory recommendations.

Credit crunch concerns

Rob Nichols, president and CEO of the American Banking Association, a trade group, urges policymakers to “refrain from pushing new and unrelated regulatory requirements that could limit the availability of credit.” Since SVB and Signature Bank collapsed, lenders – especially mid-sized and regional banks – have had to be more selective about who they lend to, with rising interest rates and shrinking deposits on hand.

Some lawmakers, including Massachusetts Senator Elizabeth Warren, said the Fed’s report called for “the Fed to immediately adopt stricter banking supervision and for Congress to quickly strengthen banking regulations to prevent another crisis.”