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A post-mortem evaluation of Signature Bank of New York (SBNY) by the U.S. Federal Deposit Insurance Corporation (FDIC) identified poor governance and inadequate risk management practices as the root cause of its collapse.
Signature Bank was shut down by federal regulators on March 12 in an attempt to protect the US economy and bolster public confidence in the banking system. The FDIC has been appointed to manage the insurance process.
@federalreserve @USTreasury @FDICgov issue statement on actions to protect the US economy by strengthening public confidence in our banking system, ensuring depositors’ savings remain safe: https://t.co/YISeTdFPrO
— Federal Reserve (@federalreserve) March 12, 2023
An April 29 FDIC report on the subject highlights that the collapse of major US banks Silvergate Bank and Silicon Valley Bank led to illiquidity due to runs on deposits. The regulator went on to say:
“However, the main reason for the failure of SBNY was poor management. SBNY management did not prioritize good corporate governance practices, did not always listen to the concerns of FDIC experts, and did not always respond to or implement FDIC Supervisory Recommendations (SRs) in a timely manner.”
The FDIC accused SBNY’s board of directors and management of seeking “unstoppable growth” using uninsured deposits without implementing liquidity risk management strategies. The final nail in the coffin for Signature Bank was that it was unable to manage the liquidity required to fulfill large withdrawal requests.
The report also shows that Signature Bank often refused to respond to FDIC concerns or comply with the regulator’s oversight recommendations. Since 2017, the FDIC has sent numerous oversight letters to SBNY citing criticism from regulators, auditing, or risk management, as shown below.
Due to non-compliance with recommendations, the FDIC has downgraded SBNY’s liquidity component rating to ‘3’ effective 2019, reiterating the need for improved fund management practices.
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Two government agencies were reportedly investigating Signature Bank for money laundering prior to its collapse. The March 15 report highlights that the Justice Department is investigating the bank for possible money laundering.
In addition, the Securities and Exchange Commission is reportedly conducting a parallel investigation. However, it remains unclear how the investigations contributed to the bank’s closure.