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Signature Bank Collapse: A Case Study in Mismanagement and Rapid Growth

The FDIC recently attributed Signature Bank’s collapse in March, the third-largest bank failure in U.S. history, to poor management and a lack of adequate risk management practices. According to the federal regulator’s report, Signature Bank pursued rapid growth without implementing necessary controls, ignoring red flags raised by the FDIC and failing to respond promptly to supervisory recommendations.

Unrestrained Growth and Uninsured Deposits

Signature Bank’s growth strategy relied heavily on accumulating uninsured deposits, neglecting fundamental liquidity risk management practices and controls. Moreover, the bank’s involvement with cryptocurrency deposits exposed it to further risk, as it failed to understand the potential fallout from the crypto industry’s turmoil in late 2022 and early 2023.

A Domino Effect

The failure of Silicon Valley Bank and the self-liquidation of Silvergate Bank in La Jolla, California, triggered a rapid withdrawal of deposits from Signature Bank, leading to massive deposit runs. This unprecedented event surprised both regulators and the banking industry, potentially prompting changes in regulation, supervision, and liquidity risk management.

Fast Growth: A Double-Edged Sword

Signature Bank’s rapid growth strategy saw total assets increase by 175% from the end of 2017 ($43.1 billion) to the end of 2021 ($118.4 billion), before declining to $110.4 billion at the end of 2022. The U.S. Government Accountability Office (GAO) reported in April 2023 that Signature Bank grew significantly faster than its peers between 2019 and 2021. This rapid growth raised concerns among regulators about whether the bank’s risk management practices could keep up.

However, as interest rates increased in 2022, deposits began to dwindle due to volatility in the digital assets market, resulting in significant outflows of deposits from digital assets. The FDIC estimated that Signature Bank’s failure cost the Deposit Insurance Fund (DIF) approximately $2.5 billion as of March 19.

Lessons Learned

The FDIC report concluded that Signature Bank should have been more measured in its growth, implemented appropriate risk management practices, and been more responsive to the FDIC’s supervisory concerns. The report also noted that the FDIC could have been more forward-looking and forceful in its supervision.

The case of Signature Bank serves as a cautionary tale for entrepreneurs and investors, highlighting the importance of robust risk management practices and the potential consequences of rapid, unrestrained growth.