Risky Bet on Crypto and a Run on Deposits Tank Signature Bank

Signature Bank, a New York financial institution with a large real estate lending business that had recently made a play to win cryptocurrency deposits, abruptly closed its doors on Sunday, after regulators said keeping the bank open could threaten stability. of the entire financial system. .

To some extent, Signature is a victim of the panic surrounding Silicon Valley Bank, which was seized by regulators on Friday. Its closure underscores the challenges facing small and midsize banks, which often focus on niche lines of business and have a narrower customer base than Goliaths like JPMorgan Chase or Bank of America. That leaves them especially vulnerable to old-fashioned bank runs.

Silicon Valley Bank, a lender to start-ups, collapsed Friday after some ill-timed financial decisions left it struggling to meet client withdrawal requests, and just as a slowdown in venture capital funding led companies incipients to get more out of their accounts. Similarly, Signature became one of the few banks to take cryptocurrency deposits, just before the overheated industry exploded last year.

As word spread about Silicon Valley Bank's woes last week, Signature's business clients began calling the bank to ask if their deposits were safe. Many worried that their deposits could be at risk because, like Silicon Valley business clients, most had more than $250,000 in their accounts. The Federal Deposit Insurance Corporation, the entity that took over Silicon Valley, insures deposits only up to $250,000.

In announcing Signature's closure on Sunday, regulators said customers of both banks would recoup regardless of how much they had in their accounts.

“Many depositors at these banks are small businesses, including those driving the innovation economy, and their success is key to New York's strong economy,” New York Governor Kathy Hochul said in a statement.

But on Friday, with clients in a panic for their money, Signature saw a torrent of deposits pour out of its coffers, according to a person with knowledge of the matter. His shares, along with the shares of some of his peers, also continued to fall.

Still, bank leaders hoped they could weather the storm because outflows had slowed Sunday morning, the person said. When regulators told bank executives that they were effectively seizing the bank, which had 40 branches across the country, some of them were surprised. In closing the bank, New York banking regulators, acting in conjunction with the FDIC, also removed its executive team.

The demise of Signature, with assets below $100 billion, is a blow to many of the professional services firms that have come to depend on it. The bank long specialized in providing banking services to law firms, providing escrow accounts to hold clients' money and other services.

Scott Shay, Joseph DePaolo and John Tamberlane founded Signature in 1999 with the backing of Israel's largest lender, Bank Hapoalim. On a personal biography page, Mr. Shay described himself as a "thought leader and author of several widely read books on profound issues facing the Jewish community." The bank went public in 2004.

One of Signature's specialties was financing the purchase of taxi medallions, which authorize holders to operate taxis. He was known in New York for providing banking services to law firms and real estate companies, and for serving wealthy families in the area.

Is customers had included some people associated with the Trump Organization, the company of former President Donald J. Trump. The bank loaned money to Jared Kushner, Trump's son-in-law, and Kushner's father, Charles. He also helped finance Trump's golf course in Florida.

Over the last decade, Signature had begun to expand its business nationally, and to the West Coast in particular.

But Signature struggled with some of the same problems that led to the demise of Silicon Valley Bank, in that most of its clients had holdings greater than $250,000.

Regulatory filings show that more than $79 billion, or about nine-tenths, of Signature Bank's roughly $88 billion in deposits were uninsured at the end of last year. As of last week, Signature said more than 80 percent of its deposits came from law firms, accounting firms, health care companies, manufacturers and real estate management companies.

The bank also said that its customer deposits related to digital assets amounted to $16.52 billion. Signature was one of the few financial institutions to open its doors to receive crypto asset deposits, a business it entered in 2018.

That ended up being a fateful decision because the crypto assets tanked after the collapse of FTX and a subsequent criminal investigation. Another cryptocurrency-focused bank, Silvergate Bank, was forced to voluntarily close last week.

"This story is more to do with cryptocurrency, a huge misjudgment by veteran bankers," said Christopher Whalen of Whalen Global Advisors, which specializes in analyzing and consulting financial institutions. "The result was the same in a depot run."

christina zhang contributed reporting.

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