The FDIC has shed light on the reasons behind the downfall of New York’s Signature Bank. According to the report released by the federal agency, the bank’s collapse resulted from mismanagement and reckless pursuit of growth, with little consideration for the potential risks.
The recent spate of bank failures in the US has sparked questions about the reasons behind these failures. The FDIC’s investigation into Signature Bank (SBNY) provides a sobering example of what can happen when management overlooks the importance of proper risk management.
Causes of Failure and Material Loss
The Federal Deposit Insurance Corporation’s report on Friday revealed that the failure of Signature Bank was attributed to substandard management practices, as stated in the 63-page report.
”The primary cause of SBNY’s failure was illiquidity precipitated by contagion effects in the wake of the announced self-liquidation of Silvergate Bank, La Jolla, California (Silvergate), on March 8, 2023, and the failure of Silicon Valley Bank, Santa Clara, California (SVB), on March 10, 2023, after both experienced deposit runs.”FDIC Report.
The FDIC’s report emphasized that the failure of prominent U.S. banks, including Silvergate Bank and Silicon Valley Bank, resulted in a lack of liquidity due to a mass withdrawal of deposits. The regulator added: ”However, the root cause of SBNY’s failure was poor management. SBNY’s board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for the size, complexity, and risk profile of the institution.”
In the report, it is noteworthy that SBNY Management does not give importance to theorizing and does not pay enough attention to the concerns of FDIC supervisors. This situation also reveals that, recently, the collapses of Silvergate Bank and Silicon Valley Bank led to the downfall of SBNY.
The report shows that the failure of SBNY was not an isolated incident, but rather a result of poor management practices and a disregard for regulatory guidance. This serves as a warning to other financial institutions to prioritize sound risk management and compliance with regulatory standards to avoid a similar fate.
Unpracticed Risk Management Applications
According to the report, SBNY’s board and management aggressively expanded, growing total assets by 175% from 2017 ($43.1 billion) to 2021 ($118.4 billion), before dropping to $110.4 billion in 2022. In April 2023, the GAO revealed that between 2019 and 2021, SBNY’s growth of 134% significantly outpaced its peer banks’ 33% growth.
The GAO warned that such rapid expansion can indicate risk and necessitates strong risk management practices. The FDIC criticized Signature’s leadership for pursuing unchecked growth using uninsured deposits without proper liquidity risk management. Signature’s downfall was ultimately its inability to manage liquidity during large withdrawal requests.
”Inability to manage liquidity during large withdrawal requests refers to a financial institution’s failure to maintain enough readily available funds (liquidity) to meet its customers’ demands for withdrawals. When a bank experiences a sudden surge in withdrawal requests, it must have sufficient liquid assets (cash or assets that can be easily converted to cash) to meet these demands. If the bank cannot provide the requested funds, it indicates an inability to manage liquidity, which can lead to a loss of confidence among depositors and potentially trigger a bank run.”
From the report, it is understood that the bankruptcy of multiple banks at the same time is not a simple matter, but the failure of one bank can significantly affect other banks. In the case of Signature Bank, the pursuit of unlimited growth and poor management of liquidity risk seem to have contributed to its decline during times of financial distress.
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