Poor Management and Lack of Liquidity Caused Signature Bank’s Failure

During the recent hearing on prudential regulator oversight conducted by the U.S. House of Representatives Financial Services Committee, Martin Gruenberg, Chair of the Federal Deposit Insurance Company (FDIC), disclosed that inadequate management and a lack of liquidity as the primary factors behind the collapse of Signature Bank.

Gruenberg specifically pointed out the failures of Silicon Valley Bank (SVB) and Silvergate Bank and how these failures led to significant drops in stock prices and subsequent deposit outflows at other financial institutions. He emphasized that Signature Bank heavily relied on uninsured deposits without implementing sufficient risk controls, leaving it vulnerable to the spillover effects of the sector’s turmoil between late 2022 and early 2023.

According to Gruenberg, the bankruptcies of SVB and Signature Bank resulted in losses of $16.1 billion and $2.4 billion, respectively.

Meanwhile, Greg Becker, the former CEO of Silicon Valley Bank, attributed the bank’s failure to factors such as rising interest rates. Becker argued that no bank could have withstood the magnitude and speed of the bank run experienced by SVB.

Regulatory bodies and banking experts unanimously agree that deposit runs play a significant role in bank failures. Gruenberg proposed that banks with assets exceeding $100 billion should receive special consideration to facilitate orderly resolutions. He also suggested the inclusion of a long-term debt requirement in these considerations.

It’s worth noting that while the failures of Silvergate Bank, Silicon Valley Bank, and Signature Bank are often mentioned in cryptocurrency discussions, an analysis conducted by the U.S. Government Accountability Office did not identify crypto-related risks as the primary cause of Signature Bank’s collapse. Instead, it pointed to factors such as “risky business strategies” and “weak liquidity and risk management.”

The findings of the analysis indicate that there were underlying issues within the banks that extended beyond the influence of cryptocurrencies.

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