After the furor set off by the collapse of Silicon Valley Bank, (SVB) another bank has shut down.
In a statement on Sunday, regulators said they would cover depositors of SVB and take control of another entity: Signature Bank.
The bank “was closed today by its state chartering authority,” the Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) said in the joint release.
“All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” it added.
U.S. Treasury Secretary Janet Yellen also promised on CBS on Sunday that banks would not be “bailed out” as they were in the wake of the 2008 recession.
“The reforms that have been put in place mean that we’re not going to do that again,” she said. “We are concerned about depositors and are focused on trying to meet their needs,” she added.
Signature opened in 2001 and is focused on “serving the financial needs of privately owned businesses, their owners and senior managers,” its site says, adding its structure prioritizes relationship building with clients.
In the wake of the SVB crisis, and because it had participated in banking with cryptocurrency (a major crypto bank shut down last week, Silvergate Capital), Signature said it faced a bank run in the billions, according to the Wall Street Journal.
This led to the authorities stepping in. “I think the reaction was excessive,” said Barney Frank, a member of Signature’s board, per the WSJ, referring to regulators’ actions.
Last week, investors and founders alike were shocked when a bank focused on startups and venture capital, Silicon Valley Bank, said it had lost $1.8 billion and planned to raise billions more.
Then, people like Ashley Tyrner, founder and CEO of FarmboxRx, a food and medicine delivery company that helps reach underserved communities, rushed to pull cash out of the bank. Tyrner told Entrepreneur on Friday that she tried and failed to withdraw her money from the bank on Thursday.
A spokesperson for the company told Entrepreneur on Monday morning the company had just gotten access to the “eight figures” in FarmboxRx’s SVB account.
“They are moving it all to Bank of America,” the representative added.
The panic presents a risk to the larger financial system. If everyone withdraws deposits at once, it creates what is called a “bank run,” which can cause a bank to collapse. Banks are required to hold just 10% of a “bank’s demand and checking deposits,” per the Federal Reserve.
Contagion is a phenomenon by which struggles in the financial system can easily spread (think the crypto collapses of 2022 of Celsius and Genesis Trading).
One expert, Paul Ashworth, chief North America economist at London-based Capital Economics, said in a note to the research firm’s clients that the plan to save the banks’ deposits should work, per the New York Times.
“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” he wrote.
https://www.entrepreneur.com/business-news/why-did-signature-bank-fail-collapse-shut-down-details/447481