The Blog

Node Notes: analyzing the Signature Bank shutdown

Welcome to our new series, Node Notes, where we’re spotlighting topics from our bi-weekly research piece, The Node Ahead. If you want to read the full piece, you can check out our blog or sign up to receive The Node Ahead straight to your inbox. This edition of Node Notes is an excerpt from Node Ahead 39.

The FDIC’s signature move

In the crypto industry, there were two primary banks, Silvergate Bank and Signature Bank, that most of the industry used over the last several years. Unlike Silvergate, where the majority of deposits were derived from crypto firms, Signature primarily serviced real estate. At the end of 2022, Signature had around $110B in deposits, of which roughly 20% came from crypto-related clients. Similar to Silvergate’s SEN network, Signature had its own 24/7/365 settlement network for fiat to crypto called Signet. After Silvergate wound down and shuttered SEN, Signet was positioned to benefit as one of the last remaining critical crypto banking infrastructure providers. As we covered in our March 14th edition, Silvergate announced on March 8 that it would wind down operations and voluntarily liquidate the bank in an orderly manner, including full repayment of all deposits. Four days later, Signature Bank was taken over by the NYDFS and FDIC.

The official reason for the New York State Department of Financial Services’ (NYDFS) decision to close Signature and name the FDIC as the receiver was to “protect depositors” and stop “systemic risk.” Here’s the puzzling thing about that explanation: Signature Bank was still fully solvent at the time the NYDFS forcefully took it over. In fact, Signature only held 7% of its total assets in long-dated securities, far less than Silvergate, SVB, and First Republic Bank. Furthermore, its unrealized losses on these securities were not particularly large, indicating that the bank was not actually at risk of a bank run. And as we just explained, Signature did not have the concentration risk that Silvergate had in crypto or SVB had in venture-backed startups. This was not a case of bankers making bad loans or having poor risk management, which begs the question, why was Signature Bank forced into receivership?

The day after Signature was closed, Barney Frank affirmed that Signature was solvent, that leadership was shocked when the bank was put into receivership, and stated that the business would have been able to operate as normal had the NYDFS not stepped in. Who is Barney Frank, you ask? Well, he is a former congressman and the “Frank” in Dodd-Frank, the 2010 bill designed to reform banking practices following the 2008 crash. He just so happens to also be a board member of Signature Bank. If there is anyone who is intimately knowledgeable on the intersection of banking policies and this particular bank, it would be this man. And he has said numerous times in various interviews that not only was Signature not at risk of going under but that the bank was shut down for purely political reasons. According to Frank, a noted crypto skeptic himself, Signature was closed to instill fear into other banks and incentivize them not to provide banking services to crypto companies.

And based on the evidence at hand, Barney Frank might have a point. First off, the NYDFS has avoided claiming that Signature was insolvent, even when asked directly. There appears to have been no credit risk, no interest rate risk, and no liquidity risk with regard to Signature. Instead, the regulator has made vague and subjective claims when pressed about why Signature was taken over, such as “a lack of confidence in the bank’s leadership.” Assuming the claims about the financial health of the bank are true (and we have no reason at this point to believe otherwise), that would make Signature Bank the first ever bank to be put in receivership that was liquid and solvent. Second, other banks in presumably worse financial positions were given time to either save themselves by raising capital or accessing the Fed’s new BTFP facility. However, Signature was never given either of those opportunities. Third, most receivership situations occur on Friday afternoons after the market closes. However, Signature’s forced closing was snuck in on a Sunday night. Fourth, normally these types of actions get their own press release but not Signature. Instead, the FDIC decided to communicate the decision by burying it in the press release regarding Silicon Valley Bank. Even the FDIC was reportedly surprised on Sunday, having not been previously told by the NYDFS that they would be taking over Signature Bank the following day. None of these are standard operating procedures.

And just in case you think I have my tin foil hat on, spewing government conspiracies, I’m not the only one with questions. The Wall Street Journal, notoriously critical of the crypto industry, wrote not one but two articles agreeing with Barney Frank and claiming Signature was closed down because “its customers were politically unpopular” and that “the FDIC all but confirmed it closed the bank over crypto.” In addition, Republican House leader Tom Emmer is questioning the FDIC’s recent actions stating the agency is “weaponizing the recent instability in the banking sector to purge legal crypto activity from the U.S..” And Jake Chervinsky, the Chief Policy Officer at the Blockchain Association, sent FOIA requests to the Fed, FDIC, and OCC, demanding information about what he calls “the unlawful de-banking of crypto companies.”

But if there was any doubt that Signature was closed because of its ties to crypto, the FDIC’s next move all but confirmed it. Following the receivership, the FDIC began looking to sell Signature Bank but made it a condition that the buyer must not take on Signature’s crypto-related accounts nor operate Signet, the bank’s crypto transfer network. David French wrote for Reuters that his sources confirmed: “Any buyer of Signature must agree to give up all the crypto business at the bank.” If true, the FDIC broke the law because when the FDIC takes receivership of an entity, they become a fiduciary to all stakeholders, including shareholders and debt holders. That means they have a legal obligation to maximize the value of the assets. The crypto deposits were worth billions of dollars, and Signet gives any acquiring bank an enormous competitive advantage in the market as one of the only bank-controlled fiat to crypto rails still operational. Not including these assets in a sale objectively does not maximize the value for shareholders.

On March 20, the FDIC did, in fact, sell Signature to Flagstar Bank, and lo and behold, none of the crypto deposits or Signet were included in the sale. Flagstar left billions of dollars worth of deposits held by Signature Bank’s digital assets business on the table. Nor did Flagstar acquire Signet. Again, why wouldn’t FDIC or Flagstar want to include these given their value? Even if Flagstar didn’t want the crypto business for some reason, there have reportedly been other bidders for Signet and Signature’s crypto deposit base, which the FDIC has refused to sell. Unless, of course, the FDIC’s motivation all along had nothing to do with Signature’s financial health or the value of the bank, and Signature was shut down solely to cut off another bridge between crypto and the traditional banking system.

Though regulators have publicly denied it, it appears that regulatory agencies stepped in and took control of a financially stable, private, regulated company in an effort to impose a political agenda. The bank crisis of SVB and First Republic provided an opportunity and excuse to take down the second and last remaining crypto bank. You can bet there will be investigations launched and lawsuits filed because, if that is what happened, the NYDFS and FDIC broke the law. It’s not the job of unelected bank regulators to determine which industries should and shouldn’t have access to banking. In fact, it’s illegal to systematically prevent any legal industry from accessing banking services.

Washington D.C. law firm Cooper & Kirk, the same firm that successfully sued the FDIC, Federal Reserve, and OCC over the original Operation Choke Point, released a white paper that details evidence that federal regulators have once again gone far beyond their statutory authority, handed out enforcement actions without due process, and committed Administrative Procedures Act violations. It’s a shame our regulatory agencies have resorted to this approach, causing companies to shut down operations in the US while jurisdictions in other countries are embracing crypto companies and banks.

Disclaimer:  This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely that of Brett Munster and do not express the views or opinions of Blockforce Capital or Onramp Invest.