Apr 28, 2023

FDIC Says Signature Oversight Hampered by Lack of New York Staff

Katanga Johnson, Max Reyes and Allyson Versprille, Bloomberg News

Signage outside a Signature Bank branch in the Brooklyn borough of New York, , Photographer: Angus Mordant/Bloomberg

(Bloomberg) -- The Federal Deposit Insurance Corp. acknowledged it was too slow to respond to problems at Signature Bank before the lender’s rapid collapse last month, partly due to a staffing shortage in its New York office.

The FDIC said that “resource challenges” in that office kept it from adequately staffing an examination team dedicated to the lender. The regulator also could have downgraded a key risk metric on Signature’s management, according to a report from the watchdog on Friday.

New York state financial officials closed Signature after depositors fled. Then the FDIC took over the institution on March 12, making it the third-largest bank failure in US history. Martin Gruenberg, the agency’s chairman, has remarked that Signature lost 20% of total deposits in just a “matter of hours” on March 10. The bank’s involvement with the cryptocurrency industry and lending to commercial real estate have drawn intense scrutiny.

The report is the FDIC’s most comprehensive account yet of what happened in the chaotic lead-up to the takeover of the lender. Signature was the third bank to fall in March after Silvergate Bank and Silicon Valley Bank. The Federal Reserve released a review on Friday of its oversight of SVB.

The FDIC said its inability to appropriately staff the examination team between 2017 and 2023 ended up delaying certain reviews. “These vacancies and the adequacy of the skillsets of the Dedicated Team contributed to timeliness and work quality issues and slowed earlier identification and reporting of SBNY weaknesses,” the agency said.

More broadly, the agency’s New York regional office has dealt with “persistent staffing shortages” among examiners focused on large financial institutions. The FDIC’s New York region has 61 authorized examiner positions for large financial institutions, according to the agency. Since 2020, an average of 40% of those have been vacant or filled by temporary staff, the report said.

Signature also had a concentration of very large depositors, the FDIC said. Crypto industry-related deposits alone represented 27% of total deposits in 2021.

The firm “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,” the FDIC said in its report.

In its report, the FDIC said that as late as the day before its failure, Signature had a composite rating of 2 on a key risk measure known as CAMELS. The score on the 1-through-5 scale, with 5 being the worst, indicates that regulators hadn’t taken into account all of the issues facing the bank. For example, the FDIC said the management component of the rating could have been downgraded more than a year earlier.

“Given the recurring liquidity control weaknesses, SBNY’s unrestrained growth, and management’s slow response to address findings, it would have been prudent to downgrade the Management component rating to ‘3,’ (i.e., needs improvement) as early as the second half of 2021,” the FDIC said.

Bank Failure

The root cause of the bank’s failure was poor management, said Marshall Gentry, the agency’s chief risk officer.

“Signature’s board and management pursued rapid unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for its size, complexity and risk profile,” he said on a call Friday with reporters to discuss the report.

The bank also didn’t always heed FDIC examiners’ guidance and wasn’t always timely or responsive in addressing recommendations, Gentry said. In light of those issues, the Friday report suggests that FDIC consider revising its policies for escalating matters in cases where the agency makes repeated recommendations but examiners aren’t seeing sufficient improvement. That could include downgrading a bank or pursuing enforcement sooner, Gentry said.

Separately, the New York Department of Financial Services said in its own report on the Signature failure Friday that “outstanding liquidity management issues” contributed to the bank’s collapse, while staffing constraints at the agency led to lags between examinations and the issuance of reports on examinations as well as supervisory letters.

(Updates with FDIC official comments starting in seventh paragraph.)