Signature Bank, a NYC-based bank, failed on Sunday and was taken over by the FDIC. It’s the third-largest bank to have failed in the United States—the FDIC took over Silicon Valley Bank and Silvergate, known as “crypto’s bank,” last week.
“The collapse and closing of three crypto-friendly banks within one week is certainly an issue to the crypto industry,” said James Wester, Director of Cryptocurrency at Javelin Strategy & Research “What is particularly worrisome is the concern that crypto-friendly banks were targeted by the federal government in some way.”
“Regardless, this could provide additional fuel for companies building in the crypto and digital asset space to migrate offshore,” he said.
In a joint statement, the FDIC, the U.S. Treasury, and the Federal Reserve said all deposits at Silicon Valley Bank and Signature Bank would be guaranteed. That said, shareholders and certain debt-holders of the banks won’t be protected, per the WSJ. President Biden has approved this plan, which involves making a “systemic risk exception” for these banks because of the risk of further harm to the economy should customers not have access to their deposits. This is similar to what was done during the 2008 financial crisis, with the bailout of the bank Bear Stearns.
In a separate article, the WSJ highlighted bipartisan criticism of this approach from regulators, and noted that part of this financial instability can be traced to legislation that was passed in 2018 to deregulate smaller banks.
Specifically, the legislation cut the number of banks subject to heightened Federal Reserve oversight by raising a key regulatory threshold to $250 billion in assets from an earlier $50 billion cutoff. By raising the threshold, the new legislation gave regulators space to lighten the load for SVB and other midsize firms like it.
Had the lightened rules not been in place for such lenders, for instance, SVB’s capital position likely would have eroded slowly over time as the Fed raised interest rates. That would likely have prompted the firm and its supervisors to take steps earlier to place the lender on sounder financial footing before last week’s meltdown, say industry observers.
Until their collapse, Silvergate, Signature Bank, and Silicon Valley Bank occupied a crucial place in the crypto world: Silicon Valley Bank provided accounts for many crypto exchanges, Silvergate ran the Silvergate Exchange Network, enabling customers to move money between exchanges instantaneously. And Signature Bank has a payments network named Signet, which allowed crypto clients to make real-time payments in dollars 24/7. If Signet goes away, it will become a lot harder for crypto traders to get in and out of exchanges.