Signature bank collapse fueled by crypto games and run on deposits

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

To some extent, Signature is a victim of the panic surrounding Silicon Valley Bank, which regulators seized on Friday. The closure underscores the challenges facing small and medium-sized banks, which often focus on niche industries and have a narrower customer base than Goliaths such as JPMorgan Chase or Bank of America. This makes them particularly vulnerable to old-fashioned bank runs.

Silicon Valley Bank, a lender to start-ups, imploded on Friday after some bad financial decisions left it struggling to meet withdrawal requests from customers – and just as a downturn in venture capital funding prompted new companies to tap into its accounts more . Likewise, Signature became one of the few banks to welcome cryptocurrency deposits just before the overheated industry exploded last year.

As word of Silicon Valley Bank’s troubles began to spread last week, corporate customers of Signature began calling the bank asking if their deposits were safe. Many were concerned that their deposits could be at risk because, like corporate clients in Silicon Valley, most had more than $250,000 in their accounts. The Federal Deposit Insurance Corporation, the entity that seized Silicon Valley, only insures deposits up to $250,000.

In announcing the closure of Signature on Sunday, regulators said customers of both banks would be made whole regardless of how much they had in their accounts.

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

But on Friday, with customers panicking about their money, Signature saw a stream of deposits leave the till, according to a person with knowledge of the matter. The stock, along with the shares of some of its peers, also continued to advance.

Still, the bank’s executives expected to weather the storm because outflows had slowed by Sunday morning, the person said. When regulators told bank executives that they were indeed cracking down on the bank, which had 40 branches across the country, some of them were shocked. By closing the bank, the banking supervisors in New York, in cooperation with the FDIC, also removed the group’s management.

The demise of Signature, with assets of less than $100 billion, is a blow to many of the professional services firms that have come to rely on it. The bank has long specialized in providing banking services to law firms, providing escrow accounts to hold client 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 was listed on the stock exchange in 2004.

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

Its clients had included some people associated with the Trump Organization, former President Donald J. Trump’s company. The bank lent money to Jared Kushner, Mr. Trump’s son-in-law, and to Mr. Kushner’s father, Charles. It also helped finance Mr Trump’s golf course in Florida.

Over the past decade, Signature had begun to expand its operations nationally, and particularly to the West Coast.

But Signature ran into some of the same problems that led to Silicon Valley Bank’s demise, in that most of its clients had holdings above $250,000.

Regulatory filings show that more than $79 billion, or nearly 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 deposits were from law firms, accounting firms, healthcare companies, manufacturers and property management companies.

The bank also said its digital asset-related client deposits stood at $16.52 billion. Signature was one of the few financial institutions that had opened its doors to take crypto asset deposits, a business it entered into in 2018.

It ended up being a fateful decision because the bottom fell out of crypto assets 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 has more to do with crypto, big error in judgment 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 deposit drive.”

Christine Zhang contributed reporting.