NYDFS Weighs up Performance after March’s Big Bank failures

The NYDFS presented its decision to close down Signature Bank as the culmination of a process that began with weaknesses on the part of the banks’ regulators as well as management.

NYDFS Weighs up Performance after March’s Big Bank failures
NYDFS Weighs up Performance after March’s Big Bank failures

After the high-profile bank collapses in March, bank authorities in the United States moved from reflection to confession. On April 28, the same day the U.S. Federal Reserve Board examined the handling of Silicon Valley Bank (SVB), the New York Department of Financial Services (NYDFS), published its internal review of Signature Bank supervision.

The banks were shut down days apart, with the NYDFS taking action against Signature Bank on March 12 and California regulators shuttering SVB on March 10.

Before them, the crypto-friendly Silvergate Bank announced its voluntary dissolution on March 8 and sparked bank runs. The mistakes caused such severe shockwaves that Vice President Joe Biden felt compelled to respond via tweet.

The Fed analysis began with critics’ observations: Supervisors “did not fully appreciate the extent of the vulnerabilities” of the bank as it “grew in size and complexity.”

However, “SVB’s foundational problems were widespread and well-known.” SVB’s management could have managed its risks.

Additionally, when supervisors did identify vulnerabilities, they needed to respond to them more quickly.

Annual capital, asset quality, management, earnings, liquidity, and sensitivity to market risk (CAMELS) examinations had shortcomings in 2021 and 2022; resolving them could have been improved by changes in the supervisory team and the bank’s rapid development.

 

“The supervisory approach at Silicon Valley Bank was too deliberative and focused on the continued accumulation of supporting evidence in a consensus-driven environment.”

 

The Economic Growth, Regulatory Relief, and Consumer Protection Act, passed in 2019, eased regulations, resulting in a “tailoring approach” to regulating many big banks, including SVB.

The report states that at the same time, a supervisory policy was modified to concentrate more emphasis on due process, which slowed down regulatory action.

However, the Fed admitted that “higher supervisory and regulatory requirements would likely have bolstered Silicon Valley Bank’s resilience even though they may not have prevented the firm’s failure.”

The NYDFS highlighted that the crypto-friendly Signature Bank had also expanded quickly in the years before its closure. Like SVB, it possessed a sizable amount of deposits not covered by the FDIC, whose coverage is limited to $250,000 per account.

In their report, the New York authorities stated that “the Bank’s growth outpaced the development of its risk control framework.”

At Signature Bank, difficulties with risk management were discovered during yearly assessments in 2018 and 2019, although they were only partially resolved.

Additionally, there were issues with supervision. The investigation stated that “internal staff constraints limited DFS’s ability to staff examinations adequately.”

Additionally, “DFS’s internal processes need clearer guidelines for instances in which a bank fails to address findings promptly or when examiners need to escalate regulatory concerns.” In addition, the NYDFS’s review procedures had “cumbersome” procedures and no timeframes. In addition:

 

“[The NY]DFS will consider whether banks need to conduct table-top exercises demonstrating their operational readiness to collect and produce accurate financial data at a rapid pace and in a stress scenario.”

 

The NYDFS described the closure of Signature Bank as the conclusion of a process that started in November with the collapse of the cryptocurrency exchange FTX.

The NYDFS started requiring Signature to “provide periodic liquidity updates,” which were made daily in January and shifted to monitoring calls on March 8. This was because of the NYDFS’s reputation as being crypto-friendly.

The Signature Bank “narrowly survived the immediate deposit run” the previous week, and the NYDFS collaborated with federal authorities throughout the weekend of March 11–12.

The bank’s reporting was inconsistent, and its liquidity was deemed inadequate by regulators on March 12. As a result, they took control of the bank and named the FDIC the receiver.

Even after Signature Bank closed, there was still volatility in the banking industry. A week later, UBS undertook a rescue takeover of the Swiss bank Credit Suisse.

The share price of the American Bank First Republic, which was likewise distinguished by a substantial amount of uninsured deposits, started to fall in March. After trading at $119.74 on March 1, its share price dropped 43.3% in a single day to $3.51, causing rumors that the FDIC would also take over the company.

 


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