In Wake of Signature Bank Collapse, NY Regulator Is Watching Risk Factors of Other Institutions

New York Department of Financial Services (DFS) Superintendent Adrienne Harris told state senators on Tuesday that her agency has identified a number of banks that have high percentages of uninsured deposits and a number of other risk factors, in the wake of the agency’s closing of Manhattan-based Signature Bank in March.

Harris told the Senate Committee on Banks that the agency is requiring daily liquidity reporting from each of those institutions to ensure that they have enough cash on hand in the event that those institutions experience “a propulsive run,” as Signature Bank had.

State regulators closed Signature Bank on March 12, a Sunday, in the third-largest failure in U.S. banking history, and two days after authorities had shuttered Silicon Valley Bank.

The Federal Deposit Insurance Corporation (FDIC) took control of Signature Bank, which had $110.3 billion in assets and nearly $88.6 billion in deposits at the close of 2022.

Harris, an attorney who served in the U.S. Department of the Treasury under former President Barack Obama, was nominated to lead DFS by Governor Kathy Hochul in August 2021. Harris was confirmed by the Senate in January 2022.

Harris said the state agency waited as long as it could before intervening, and she steadfastly indicated that cryptocurrency was not the cause for Signature Bank’s failure, nor was the state’s “animus” toward cryptocurrency or digital asset companies.

Signature, over a number of years, did not perform sufficient liquidity stress testing to account for its growth and business model, Harris said.

It also did not have a good handle on its data. For instance, in the bank’s last day, its estimates of known outflows quadrupled—from less than $2 billion to nearly $9 billion. Signature’s run of depositor withdrawals hit the bank across the board, and was not weighted toward cryptocurrency, she added.

The superintendent said that she worked with fellow regulators at the FDIC and the Federal Reserve in determining that, if Signature were allowed to open on March 13, “we would have seen contagion across the country, potentially wiping out small and mid-sized banks across the country.

“It’s why the federal regulators took the extraordinary steps that they did in instituting the systemic risk exception to cover all uninsured depositors, and we were thankful for that,” she said. 

The committee also heard from Barney Frank, a longtime member of Congress from Massachusetts who had served as one of Signature Bank’s most prominent former board members. Frank asserted that the financial institution was shuttered “prematurely” and was a casualty of guilt by association with the precursor Silicon Valley Bank collapse.

A Democrat who served in the U.S. House of Representatives from 1981 to 2013, Frank helped shape the landmark Dodd-Frank legislation that was designed to make the banking system safer in wake of the 2008 financial crisis. He said the act was partly to blame for Signature Bank’s demise, indicating its tougher reporting requirements resulted in an increase to the stigma of borrowing from the Fed. 

Frank suggested cryptocurrency had more to do with the bank’s closure than Harris had indicated.

He noted that he is personally against the invention of cryptocurrency, but in light of having to deal with its existence, the head of Signature Bank had employed what Frank said was a thoughtful idea to facilitate commercial transactions involving digital assets. “That’s not just the way you make money,” he said. “It’s your social function.”

But then people in the cryptocurrency business “panicked,” Frank said, while suggesting that Signature’s assets, capital, and loan portfolio were all “fine”: “The only problem we had was crypto fear—inaccurate withdrawals.”

Frank also said that he remembered sitting in a February meeting with DFS and FDIC regulators who at no point sounded an alarm, nor did anyone signal that serious difficulty was looming. On the contrary, Frank said, the bank had been given a very high rating.

“In fact, what transpired was that nobody, including the regulators, foresaw the incredible run on the bank that we had,” he said.

Frank defended his decision to take the Signature Bank post in 2015, two years after he had left Congress. He said he doesn’t feel guilty serving as a “very well-compensated” part-time board member. He said that during his political career, he chose not to opt into the pension system and did not want to become a lobbyist in his post-political career.

Harris, meanwhile, signaled her support for a proposed Assembly bill that would enhance her agency’s authority to remove bank leadership for misconduct, stating: “My hope is that it will also be introduced in the Senate and move forward. Right now, our tools, frankly, are pretty limited when it comes to the removal for misconduct by an executive, so we would like to see that enhanced.”