Signature Bank Collapse: Crypto Exposure’s Role and Lessons for Future Regulations

Gloomy bank interior, shattered bank sign, crypto coins scattered, officials investigating, dark stormy skies, financial charts plummeting, vintage painting style, chiaroscuro lighting, desperate mood, sense of collapse, $100 billion asset warning, hints of future regulations.

Investigations surrounding the recent collapse of Signature Bank have indicated that illiquidity and poor management may be at the forefront of the issue. However, Federal Deposit Insurance Corporation (FDIC) chairman, Martin J. Gruenberg, has expressed his belief that the bank’s failure to comprehend the risks tied to cryptocurrencies played a significant role in accelerating its demise.

During the hearing on “Oversight of Prudential Regulators,” Gruenberg pointed to the example of two other banks, Silicon Valley Bank (SVB) and Silvergate Bank, whose failures similarly led to a substantial decline in stock prices and a subsequent outflow of deposits at other financial institutions. The FDIC Chief Risk Officer supported this stance in a related report, citing inadequate management as the primary cause behind the collapse of Signature Bank.

Gruenberg also emphasized that Signature Bank had placed an overreliance on uninsured deposits without the necessary risk controls in place. He stated, “Additionally, the bank failed to understand the risk of its association with, and reliance on, crypto industry deposits or its vulnerability to contagion from crypto industry turmoil that occurred in late 2022 and into 2023.”

While it is widely agreed by regulators and professionals within the banking sector that deposit runs are a critical catalyst for the downfall of banks, former SVB CEO Greg Becker argued that other factors, such as increasing interest rates, contributed to the bank’s failure. Becker explained that no financial institution “could survive a bank run of that velocity and magnitude.” Gruenberg later disclosed that the combined losses incurred due to the collapse of SVB and Signature Bank amounted to $16.1 billion and $2.4 billion, respectively.

In summary, Gruenberg suggests that banks holding assets worth $100 billion or more should be given special consideration, which may include imposing a long-term debt requirement to facilitate orderly resolutions.

However, it is worth noting that the United States Government Accountability Office’s (GAO) preliminary review did not explicitly link the collapse of Signature Bank to its exposure to cryptocurrencies. As previously reported by Cointelegraph, discussions surrounding crypto involving regulators and lawmakers continue to cite the examples of Signature Bank, Silicon Valley Bank, and Silvergate Bank. Although the exact influence of crypto exposure on these banks’ failures remains ambiguous, it is clear that their collapse has significant implications for the crypto market and future regulations.

Source: Cointelegraph

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