- The chair of the Federal Deposit Insurance Corporation has blamed the collapse of Signature Bank on its crypto exposure
- Martin Gruenberg said that the crypto contagion caused a liquidity squeeze that eventually killed the bank
- Signature’s co-founder claimed that the bank did all it could to distance itself from the collapsing crypto space in late 2022
The downfall of Signature Bank was primarily caused by its involvement in the digital asset industry, according to Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg. During a speech before the House Committee on Financial Services this week, Gruenberg explicitly pointed out that Signature Bank’s reliance on deposits from the crypto industry and its exposure to the volatility and instability of the digital asset industry during late 2022 and into 2023 were significant factors contributing to its vulnerability and eventual demise. He did, however, also acknowledge that the FDIC failed to act promptly in order to prevent the crisis from spreading across Signature Bank’s operations.
Debate Over Signature Bank Closure
Signature Bank was abruptly shuttered in March by regulators after it failed to prove it could honor customer deposits, with the FDIC saying at the time that it posed a “systemic risk” to the US economy. The bank was heavily involved in the crypto space, with customers such as Coinbase, Celsius, and Paxos on its books.
However, Signature Bank board member and former congressman Barney Frank argued that the bank was not insolvent and that the U.S. government wanted to send a “very strong anti-crypto message”, something that the New York Department of Financial Services denied.
Crypto Contagion Caused Liquidity Crunch
FDIC chair Greunberg struck a different tone, saying that Signature’s decline can be attributed to poor governance and inadequate risk management practices, with its over-reliance on crypto-related depositors affecting a liquidity crunch following the collapse of FTX.
This over-reliance led to a situation where the institution was unable to effectively manage its liquidity as the crypto contagion hit, ultimately resulting in its inability to fulfill substantial withdrawal requests. This was despite Signature Bank trying to distance itself from the crypto space following FTX’s collapse, according to former chairman and co-founder of the bank, Scott Shay, during a prepared testimony this week.
Shay disclosed that the bank significantly decreased its digital asset deposits due to increased market volatility and regulatory concerns towards the end of the previous year, but it seems that some are not convinced that this action was strong enough.
