Signature Bank Failed. Are More U.S. Banks Next?

On Friday, March 10, 2023, Signature Bank lost 20% of its deposits. (Vivian Giang & Mike Dang, The New York Times; Max Reyes, Bloomberg). Two days later, on Sunday, March 12, 2023, Signature Bank failed and went into receivership. (Vivian Giang & Mike Dang, The New York Times). Signature Bank’s failure was unexpected, so much so that it’s only the second time in over a decade that the Federal Deposit Insurance Corporation (“FDIC”) created a bridge bank in response to a bank failure. (Federal Deposit Insurance Corporation). How and why did Signature Bank fail so quickly? Are more U.S. Banks next? These answers and more, but first, it’s helpful to understand what happens immediately after a bank fails.

In the U.S., banks are either state banks or national banks, meaning they are either chartered and regulated under state laws or under federal laws. (Julia Kagan, Investopedia). Prior to its failure, Signature Bank was chartered in New York. (New York State Department of Financial Services). Under New York banking laws, the New York Department of Financial Services (“DFS”) may take possession of any New York-chartered bank whenever it appears the bank is in an unsound or unsafe condition to transact its business or has an impairment of its capital. (N.Y. Banking Law § 606). Under this authority, on March 12, 2023, DFS took possession of Signature Bank and appointed the FDIC as the receiver. (N.Y. Banking Law § 606; 12 U.S.C. § 1821(c)(2)(A)(ii)). A receiver is the entity that handles all the affairs of a failed bank. (Henry Fields et al., Morrison & Foerster LLP). The receivership continues until all of the bank’s assets are sold and all claims against the bank are resolved. Id. DFS stated that it based the decision to take possession of Signature Bank on the bank’s current ability to conduct business in a safe and sound manner. (Max Reyes, Bloomberg).

As receiver, the FDIC created ‘Signature Bridge Bank’, a temporary bank operated by the FDIC and used as an interim measure for managing Signature Bank’s assets, paying its creditors, and resolving its liabilities. (Federal Deposit Insurance Corporation; 12 U.S.C. § 1821(d)). When the FDIC opts to use the bridge bank option for receivership, the original bank charter is terminated, and a new temporary bank with a new federal bank charter and a new bank name is issued. (Katelyn Peters, Investopedia). The FDIC operates the bridge bank until the FDIC finds a buyer via a bidding process. Id. The FDIC uses the bridge bank procedure when the FDIC does not have enough time to effectively market the institution to a third party before failure. (Federal Deposit Insurance Corporation). Since the 2008 financial crisis, and prior to the failures of Signature Bank and Silicon Valley Bank, the FDIC has created only three bridge banks as part of the receivership process. (Federal Deposit Insurance Corporation). The FDIC rarely uses bridge banks because the FDIC generally has some foresight into when a bank is going to fail, and proactively arranges potential buyers, thus preventing the need for a bridge bank.

As soon as the FDIC created Signature Bridge Bank, the FDIC began marketing the bank for acquisition to healthy FDIC insured banks on its “bid list”. (Federal Deposit Insurance Corporation). The FDIC-created bid list is based on several factors related to the alignment between the potential acquirer's qualifications and interests, and the characteristics of the failing bank. (Federal Deposit Insurance Corporation). Factors may include capital ratios, regulatory ratings, assets and core deposits, and geographic location of the banks. Id. The FDIC then granted interested bidders for Signature Bridge Bank access to a secure website dedicated to marketing the bank and allowing the potential bidders to conduct due diligence. (Federal Deposit Insurance Corporation). Notably, the FDIC does not negotiate transaction terms with each potential bidder. Id. Rather, the FDIC conducts a sealed bid process based on standard transaction terms. Id. Accordingly, it is unknown which institutions placed bids for Signature Bridge Bank.

On March 20, 2023, just seven days after Signature Bank went into receivership and Signature Bridge Bank was created, the FDIC entered into a purchase and assumption agreement with Flagstar Bank N.A. (“Flagstar”) for Flagstar to buy substantially all deposits and certain loan portfolios of Signature Bridge Bank. (Federal Deposit Insurance Corporation). Some of the details of the transaction have caused speculation about why Signature Bank failed. Former U.S. Congressperson, Barney Frank, said that regulators seized Signature Bank “to send a message to get people away from crypto.” (The Editorial Board, The Wall Street Journal). Prior to its collapse, 20% of Signature Bank’s deposits were related to digital assets. (Federal Deposit Insurance Corporation). Notably, the sale of Signature Bridge Bank to Flagstar did not include the $4 billion of deposits related to Signature’s digital-assets banking business. Id. On one hand, the FDIC has effectively served its role of protecting depositors by taking Signature Bank into receivership and quickly finding a buyer on such short notice. But on the other, the confidential nature of the bidding process combined with the sequestering of the digital assets seemingly make it easy for skeptics to raise suspicions about the true motivations behind “failing” the bank.

According to a group of economics, finance, and business professors (hereinafter, “the Professors”), as many as 190 banks are at risk of failure if only half of their depositors decide to withdraw their funds. (Erica Xuewei Jiang et al., Stanford Graduate School of Business). The banks that are at risk are the ones that have a high percentage of uninsured deposits. Id. As an example, 89.8% of Signature Bank’s deposits were uninsured at the time of failure, and for Silicon Valley Bank (“SVB”), 92.5% were uninsured. (Matthew Goldstein & Emily Flitter, The New York Times). Taking these factors into account, the Professors concede that only 1% of banks have a higher percentage of uninsured deposits than SVB. (Erica Xuewei Jiang et al., Stanford Graduate School of Business). In contrast, on March 24, 2023, Fannie Mae (“Fannie”) published an economic and housing outlook concluding that the recent bank failures do not fundamentally change the baseline economic outlook the organization issued earlier in the year. (Fannie Mae). Fannie’s stance is that bank failures are an expected outcome during market contractions, and Fannie does not expect the failure of SVB or Signature Bank to trigger a tidal wave of bank failures. Id. On the same day as Fannie’s economic outlook, U.S. Treasury Secretary Janet Yellen seemed to confirm Fannie’s stance that the majority of banks are well capitalized and not at risk. (Viktoria Dendrinou & Christopher Condon, Bloomberg Law).

Only time will tell if more banks fail in the coming months. If more banks do fail, it seems likely those banks will be ones with high percentages of uninsured deposits and those with digital asset deposits.