- Signature Bank was closed down by the state regulators on Sunday, following the collapse of Silicon Valley Bank just two days prior
- Like Silicon Valley Bank, investors in Signature Bank have been wiped out, but the regulators have stepped in to guarantee 100% of deposits within the bank
- Banking stocks were down heavily on Monday, especially smaller regional banks such as First Republic Bank (-61.83%) and Western Alliance Bancorp (-47.06%).
Following the dramatic collapse of Silicon Valley Bank (SVB) on Friday, the regulators stepped in on Sunday to provide emergency support to depositors and the banking system. But it’s not the only bank that was left reeling from volatility.
Between Wednesday and Friday last week, Signature Bank stock fell over 32.27%, bringing the total loss for investors to 75.84% over the last year. By Sunday, that loss was at 100%.
On the same day as they announced the support for SVB depositors, the joint statement from the Treasury, Federal Reserve and the FDIC explained that state regulators would also be shutting down Signature Bank.
The statement read:
“We are also announcing a similar systemic risk exception for Signature Bank, which was closed today by its state chartering authority. All depositors of this institution will be made whole. No losses will be borne by the taxpayer.
Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed.”
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Who was Signature Bank?
Signature Bank was founded in New York in 2001, with a business model catering to high net worth clients and a high tough, personal approach. Over time the business expanded and changed, and in 2018 they began to work with the crypto sector.
Crypto businesses often find it challenging to access banking services, and the fact that Signature Bank offered them meant their crypto links grew quickly.
By February 2023, 30% of the bank’s deposits came from the cryptocurrency sector, including major reserves for stablecoin USDC.
In late July 2022, the Financial Times published an article which outlined concerns over the banks concentration in the crypto sector, noting that 8 out of the 12 largest crypto brokers were clients of the bank.
Given that they had come to be known as the ‘crypto bank,’ it’s not too surprising to think that they will have experienced challenges with their client book, given the depths of the current crypto winter.
The circumstances leading to the collapse
It’s no secret that crypto has been hit hard over the last 18 months. Many companies have gone bankrupt, and the ones that remain have had to make serious layoffs and cutbacks in order to stay afloat.
In an environment like this, these types of companies are not going to be adding significant cash to their deposits. In many cases, they’ll be dipping into their rainy day fund to keep the lights on, reducing cash reserves with no short term plan to replace them.
For a bank, this provides challenges with liquidity. As we saw with Silicon Valley Bank, it’s common practice for banks to loan out deposits at longer durations for higher interest rates. It’s the cornerstone of fractional reserve banking, the accepted global banking system.
The full details will come out in the coming weeks and months, but it’s believed that the bank’s already shaky financial position (the stock was down over 62% even before the Silicon Valley Bank news on Thursday) and the links to crypto, caused depositors to panic late Friday, causing another bank run.
What happens to Signature Bank investors?
As outlined in the statement from the Fed, the Treasury and the FDIC, Signature Bank shareholders will see their stock value go to zero. That’s part of the risk of investing, and unfortunately those investors will have to chalk this one up to a learning experience.
It’s a key example of why diversification is so important. Smaller companies like Signature Bank can offer enticing potential returns for investors, but that doesn’t come without risk.
Signature Bank stock went from under $80 in late 2020 to hit an all-time high of $366 at the start of 2022. And now it’s worth $0.
Large banks like JPMorgan Chase and Wells Fargo are highly unlikely to see those sorts of returns, but they’re also far less likely to go to $0 as well. Investing across companies of all sizes and all industries allows investors to gain exposure to potential big winners, while not risking it all on them.
What happens to Signature Bank depositors?
The measures announced by the regulators means that depositors won’t lose anything. Unlike the 2008 financial crisis, the current banking issues are liquidity problems. There are assets that back all of the deposits in the bank, they’re just locked up in long term investments.
Protection from the regulators will mean that depositors will be able to get access to their cash if they need it, but it also means that taxpayers won’t be on the hook to make up the difference.
All that’s being provided is short term liquidity, to allow the system to continue to function as it should.
Not only that, but it has also been announced that new measures will be put in place to allow banks to access short term capital if they are impacted by liquidity issues like this in the future.
The fallout for banking stocks
It’s not good news for regional banks right now. Account holders are a little nervous, and we’re seeing a flight of cash from small banks into large ‘too big to fail’ ones. Whether this is necessary given the Feds intervention is debatable, but it’s happening anyway.
On Thursday, a number of regional banks saw major value wiped off their market cap, including First Republic Bank (-61.83%), PacWest Bancorp (-21.05%), Western Alliance Bancorp (-47.06%) and Zions Bancorp (-25.72%).
The big banks were also down, but given the level of general banking negativity, these drops could be considered fairly minor. JPMorgan Chase closed Thursday down 1.8%, Bank of America fell 5.85%, Wells Fargo dropped 7.13% and Citi was down 7.47%.
However, all of these banks were up in after hours trading on Thursday.
Most analysts agree that there is no fundamental concern about the stability of the banking system. This has been an issue of liquidity and the ability for banks to access their assets fast enough to pay out depositors, not a concern over the actual fundamental value of those assets like in 2008.
The bottom line
It’s been a nerve wracking few days for investors holding bank stocks, and we’re likely to see some continued volatility in the coming days. It’s going to be very interesting to see how the Fed responds at the next FOMC meeting, as it’s hard to see them raising rates given the turmoil of the past few days.
As always, there’s no way of knowing exactly what will happen, but if the Fed does pause their rate hikes, markets could rally. Or they might charge on regardless, and markets could tumble.
It’s important to stay invested and diversified for long term returns, but protecting your downside when possible is incredibly important as well.
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