FDIC pins Signature Bank’s failure on poor governance and illiquidity

Regulation

The United States Federal Deposit Insurance Corp’s (FDIC) post-mortem assessment of Signature Bank of New York (SBNY) revealed poor management and inadequate risk management practices as the root cause for its collapse.

Signature Bank was shut down by federal regulators on March 12 in a bid to protect the U.S. economy and strengthen public confidence in the banking system. FDIC was appointed to handle the insurance process.

On April 29, FDIC’s report on the matter highlighted the collapse of major US banks — Silvergate Bank and Silicon Valley Bank — caused illiquidity due to deposit runs. The regulator further stated:

“However, the root cause of SBNY’s failure was poor management. SBNY management did not prioritize good corporate governance practices, did not always heed FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations (SRs).”

FDIC blamed SBNY’s board of directors and management for pursuing “unrestrained growth” using uninsured deposits without implementing liquidity risk management strategies. The final nail in the coffin for Signature Bank was when it could not manage liquidity, which was required to fulfill large withdrawal requests.

The report also revealed that Signature Bank often denied addressing FDIC’s concerns or implementing the regulator’s supervisory recommendations. Since 2017, FDIC sent numerous supervisory letters to SBNY citing regulatory, audit or risk management criticisms, as shown below.

Due to non-compliance with the recommendations, the FDIC had downgraded SBNY’s Liquidity component rating to “3” starting in 2019, further highlighting the need to improve its funds management practices.

Related: ‘Ludicrous’ to think Signature Bank’s collapse was connected to crypto, says NYDFS head

Two government bodies were reportedly investigating Signature Bank for money laundering prior to its collapse. A report from March 15 highlighted that Justice Department was investigating the bank for potential money laundering.

In addition, a parallel probe by the Securities and Exchange Commission was reportedly underway. However, it remains unclear how the investigations aided the bank’s closure.

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