Systemic Failure at Signature Bank: Understanding the Risks and Challenges

On Friday, Signature Bank customers spooked by the sudden collapse of Silicon Valley Bank withdrew more than $10 billion in deposits. Source : CNBC.

That run on deposits quickly led to the third-largest bank failure in U.S. history. Regulators announced late Sunday that Signature was being taken over to protect its depositors and the stability of the U.S. financial system.

Signature Bank had 40 branches, assets of $110.36 billion and deposits of $88.59 billion at the end of 2022, according to a regulatory filing.

Signature Bank was a New York-based commercial bank that provided a range of financial services to businesses and individuals. The bank was founded in 2001 and had since become one of the fastest-growing banks in the United States. Despite its success of all these, Signature Bank had experienced systemic failures because of some of the below reasons.

Reasons for Systemic Failure:

Insider Trading Scandal: In 2018, Signature Bank was involved in an insider trading scandal that rocked the banking industry. The bank's former president, Joseph DePaolo, was accused of providing insider information to a hedge fund manager, resulting in illegal profits of over $1 million.

This scandal not only resulted in significant reputational damage for Signature Bank but also raised questions about the bank's internal controls and governance practices. The incident led to the resignation of several top executives and a significant decline in the bank's stock price.

Overreliance on Real Estate Lending: Another factor that had contributed to the systemic failure at Signature Bank is its overreliance on real estate lending. The bank's lending portfolio was heavily skewed towards commercial real estate loans, which accounted for over 80% of its loan book.

This concentration of risk in a single asset class was always problematic, particularly in times of economic downturns or market volatility. In the event of a real estate market crash post the pandemic and successive downturn of economy, Signature Bank faced significant loan losses and asset write-downs which had impacted its financial stability.

Concentration Risk: In addition to overreliance on real estate lending, Signature Bank had also been exposed to concentration risk in other areas of its business. For example, the bank had a significant exposure to a single industry, namely the New York City taxi medallion market.

The taxi medallion market has been in decline in recent years, with the rise of ride-sharing services such as Uber and Lyft. This has resulted in a decline in the value of taxi medallions, which had also impacted Signature Bank's loan portfolio and asset quality.

Compliance and Regulatory Issues: Signature Bank had also been the subject of regulatory scrutiny and enforcement actions in recent years. In 2020, the bank agreed to pay $29 million to settle charges that it violated anti-money laundering regulations.

This settlement highlighted concerns about the bank's compliance and risk management practices, which could impact its ability to attract and retain customers and investors. Moreover, ongoing regulatory scrutiny and enforcement actions resulted in significant legal and reputational costs for the bank.

Conclusion:

In conclusion, while Signature Bank was a successful financial institution with a strong reputation in the banking industry, factors such as the insider trading scandal, overreliance on real estate lending, concentration risk, and compliance and regulatory issues may all have contributed to its downfall in an accelerated manner.

It was important for Signature Bank to have addressed these concerns and taken proactive steps to mitigate its risks and improve its governance, compliance, and risk management practices. By doing so, the bank could have maintained its competitive edge and continued to provide value to its customers and investors.