March 12th EST, the US Treasury Department announced the closure of Signature Bank by the New York State Department of Financial Services, and customers can apply for withdrawal of their deposits on Monday. The biggest similarity between Signature Bank and the two other recently collapsed banks, Silvergate Bank and Silicon Valley Bank, is that they all involve cryptocurrency business. Signature Bank, as the only bank that has been temporarily spared from a liquidity crisis caused by customer panic withdrawals, was closed by the regulators, causing a stir in the market. This article will analyze the possible reasons behind the closure of Signature Bank and its impact on the market based on the information that has been disclosed.
Signature Bank (SBNY) was founded in 2001, and its main business is to provide private banking services for high net worth individuals and their related business. Starting in the first quarter of 2018, SBNY added cryptocurrency business services, providing access to fiat banking services for regulated stablecoin issuers, exchanges, custodians, cryptocurrency miners, institutional traders, and others. According to its annual report released last year, by the end of 2022, its total assets were $110.3 billion, and customer deposits (liabilities) were $88.5 billion.
Looking at the liabilities side, after FTX crashed down in 2022 Q4, SBNY management intentionally reduced its risk exposure in the cryptocurrency business, proactively reduced the business proportion, and decreased customer deposits by $12.39 billion. The final cryptocurrency customer deposits in Q4 2022 were $17.7 billion, accounting for 20% of all customer deposits. From the analysis of the concentration of the bank's assets and liabilities, this business proportion is relatively reasonable. From the range of services provided, SBNY does not invest in, hold, or custody cryptocurrency, only engages in USD deposit business, and can conduct 7*24 real-time USD transfer transactions through the Signet system internally established by SBNY. Unlike Silvergate Bank, SBNY also does not provide loan business with cryptocurrency as collateral and is relatively conservative in its business direction. According to the financial data of the 23 Q1 report released by SBNY earlier this month, the total customer deposits were $826 million, and the cryptocurrency-related customer deposits were about $144 million, accounting for about 17.43%; the deposit decrease was mainly due to the decrease of cryptocurrency-related customer deposits by $1.51 billion. This is partly due to the volatility of the cryptocurrency market itself, and partly due to SBNY's increased efforts to control the overall proportion of cryptocurrency business deposits.
Looking at the assets side, SBNY's disclosed data on asset adequacy ratios shows that its core capital adequacy ratios are 11.20%, and its risk-based capital adequacy ratio is 12.32%, with a leverage ratio of 8.79%, meeting the requirements of Basel III for bank risk assets, and its overall assets are at a relatively healthy level. Looking at the details of the assets side, short-term investments were $17.4 billion, accounting for 14.98%. Under extreme circumstances, even if all cryptocurrency deposits are withdrawn, liquidity can be met.
If we compared Silvergate Bank as the "bad student" by its aggressiveness for business risk, then Signature Bank can be considered the "good student" that adheres to regulations and adjusts its business focus in a timely manner when it sees changes in the market. Therefore, if we look at the business analysis, Signature Bank will not directly face liquidity risks due to the impact of the cryptocurrency market. However, at this time, the US Treasury Department, seeing Silvergate Bank as the most aggressive cryptocurrency-friendly bank, caused adverse effects on the market under the background of interest rate hikes, and decided to close Signature Bank's business for caution.
This may be due to two reasons: first, to prevent fluctuations in cryptocurrency business by affecting Signature Bank's other business customers and then extending to the traditional banking market, for in which SBNY's overall business volume is not small; second, considering the recent regulatory rules formulated by the US from Congress, the Federal Reserve, the Treasury Department to the SEC and CFTC for the cryptocurrency industry, this may be a punishment for banks that have already engaged in cryptocurrency business, and a signal that regulators will soon introduce a more comprehensive and reasonable regulatory framework with strong measures for every link between the cryptocurrency market itself and the traditional financial market.
Regarding Silvergate Bank and Silicon Valley Bank, as I mentioned in my previous report, both collapsed under the dual effects of unstable deposits on the liability side and floating losses on long-term debt on the asset side in the background of interest rate hikes, leading to a liquidity crisis caused by mass withdrawals. Therefore, there are rumors in the market that the FOMC meeting of the Federal Reserve this month is likely to slow down its interest rate hike, and the probability of a 50bp interest rate hike has now dropped to 0. The US stock futures market has seen a small increase, and the distrust of stablecoin or fiat trading pairs has led to a simultaneous increase in the cryptocurrency market. However, looking at the timing of the uncertain cryptocurrency regulatory measures and the forthcoming release of CPI data, it may be too early to judge that the cryptocurrency market resume bullish.
References:
Signature Bank 2022 Annual Report: [https://investor.signatureny.com/pme/press-releases/news-details/2023/Signature-Bank-Releases-2022-Form-10-K/default.aspx]
Signature Bank 2023 Q1 Report: [https://investor.signatureny.com/pme/press-releases/news-details/2023/Signature-Bank-Issues-Mid-Quarter-Financial-Update-for-Its-2023-First-Quarter/default.aspx]
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