The NYSDFS Report on the Failure of Signature Bank
Further details on Signature's data and projections that regulators found unreliable
I admit that in the deluge of Federal Reserve Board/FDIC/GAO reports late last week I had missed until Sunday afternoon that the New York state financial regulator had on Friday released its own review of Signature Bank’s failure.1
In general, the DFS report paints the same broad outline of events at Signature as does the FDIC’s report, but there are a few details that I cannot recall reading elsewhere. There are also a few recommendations in the DFS report that could have implications for still-existing banks with a New York charter.
Further details on what sparked the DFS crisis of confidence in Signature’s leadership
The DFS has said that the closure of Signature Bank occurred after the bank had “failed to provide reliable and consistent data, thus creating a crisis of confidence in the bank’s leadership.” On Friday we talked about one example of these failures included in the FDIC report.
As mentioned earlier, during 2021 and 2022, SBNY increased lending in the form of capital call/subscription loans. […] SBNY intended to pledge these loans to the Federal Reserve Bank of New York (FRB-NY) as collateral for Discount Window lending. However, FRB-NY would not accept the loans as collateral because they were not eligible as many of them had foreign limited partners. SBNY pursued efforts to pledge these loans for months, hiring two law firms to make the case for FRB-NY to accept the loans. During the weekend SBNY failed, management again tried, unsuccessfully, to pledge this portfolio to FRB-NY. SBNY also unsuccessfully tried to identify alternate entities that would accept the portfolio as collateral for a borrowing line. Even though SBNY management knew they did not have a formally confirmed avenue to obtain liquidity from this portfolio, they continued to try to include these loans in collateral calculations just hours before the institution failed.
The DFS description of this situation in its own report generally tracks with the FDIC’s, although DFS explicitly includes the additional detail that Signature had “implored” the FDIC and DFS to intervene with the FRBNY.
As a result of its Fund Banking business, Signature held $18 billion in capital call loans that the Bank sought to pledge to the FRBNY. Signature knew, however, that the FRBNY would not accept these loans as collateral because of the involvement of foreign investors. Signature and its counsel had previously failed to convince the FRBNY to accept these loans as collateral. Over the weekend, Signature implored Regulators to intercede on the Bank’s behalf with the FRBNY.
The FDIC report also included a discussion of Signature’s difficulties in accurately reporting pledged securities:
In February 2023, examiners questioned SBNY’s regulatory reporting of pledged securities, which required SBNY to refile its year-end 2022 Call Report with a multi-billion upward adjustment to pledged securities. Prior to and during the weekend of SBNY’s failure, examiners informed SBNY that pledged securities were still misstated on the bank’s liquidity monitoring reports, because management continued to under-report pledged securities and overstate on-balance sheet liquidity on information provided to examiners. This issue persisted until the day SBNY failed, when management finally produced an accurate report of unpledged securities.
The DFS report adds the detail that Signature’s estimates of unpledged securities were off by a magnitude of $4.1 billion or so.
Also on Saturday, Bank executives insisted that Signature had over $5 billion in unpledged but valuable pledgeable securities available for Monday. Given the difficulties Signature had identifying pledgeable collateral Friday night, the Regulators were suspicious of this assertion. The Regulators repeatedly asked for details about those assets, which were not forthcoming. Finally, on a call at 10:00 p.m. on Saturday, March 11, Bank executives reduced the estimate of unpledged securities from over $5 billion to just $900 million.
The DFS report also includes a selection of other assertions made by Signature which the FDIC and DFS found difficult to believe.
Signature “insisted that additional deposit withdrawals [if it were to open on Monday] would be minimal,” but the FDIC and DFS concluded that this “projection was unrealistic.”
Beginning at noon on the Sunday of its failure, Signature “provided four different liquidity projections for the coming week,” all of which “projected substantial liquidity available.” The FDIC and DFS, however, “found these projections to be inaccurate and unreliable,” including because the last three of them bore an explicit disclaimer that they were “solely for informational purposes” and should not be definitively relied upon.
These liquidity projections also included “highly likely” sources of liquidity from the Federal Reserve Bank of New York, despite the fact that the FRBNY had told Signature that it would “take weeks” to evaluate the commercial real estate loans that Signature intended to pledge.
Moreover, the “FRBNY repeatedly advised the [FDIC and DFS] that it did not trust Signature’s numbers.”
Signature believed that it would see “substantial deposit inflows from clients following SVB’s failure.” The FDIC and DFS thought this was “overly optimistic.”
On this last point, the actual details are pretty wild. Of the $6 billion deposit inflow Signature was expecting post SVB failure, $5 billion of it was projected to come from an unnamed virtual currency company. As it turns out, this virtual currency company was also regulated by the DFS, so the DFS called them up and asked what the deal was. DFS then learned of information that “contradicted the Bank’s representations.”
Moreover, Signature claimed $5 billion of its projected $6 billion deposit inflow would come from a DFS-regulated virtual currency company. As a result of DFS’s oversight of that entity, DFS had information that contradicted the Bank’s representations. Specifically, that entity advised DFS that the amount being transferred from SVB to Signature was approximately half what Signature was representing and, because of delays caused by SVB being placed into receivership, the money would not be available until Tuesday at the earliest.
Recommendations
The DFS report, like the FDIC’s report, credits its supervisors for accurately identifying issues at Signature. Also like the FDIC report, however, the DFS report observes that there were delays in issuing findings in a timely manner, and says that supervisory concerns may not have been escalated appropriately. The report thus recommends improvements to DFS policies and procedures, as well as continued prioritization of actions to address "a long-running failure to maintain adequate staffing levels."2
Table-top testing of operational functions
One recommendation that may get the attention of larger New York chartered banks is the DFS’s observation that while financial assumptions and controls are frequently stress tested, “operational functions are not similarly tested.” DFS will therefore “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.”
At the federal level the FDIC and Federal Reserve Board have previously made what I think may be similar statements of intent, saying for example that as part of their next U.S. G-SIB resolution plan review they intend to conduct a focused review of “whether the firm’s reliability of data, data accuracy, and BAU data capabilities are adequate to support its resolution strategies and plans.”
Assumptions in the liquidity rules
Finally, the DFS report says explicitly what has been said slightly less directly3 in other reports: the behavior of depositors during the March banking panic “did not align” with current assumptions in the LCR rule which “have not kept pace with customer behavior or technological advancements in media and mobile banking.”
The DFS says that all regulators “would do well to revisit” their liquidity risk assessment frameworks.
Still to come
There is at least one report on Silicon Valley Bank or Signature Bank still to come. The California DFPI did not join in with the Board, FDIC, GAO and DFS in releasing a report last Friday, but has said that it intends “by early May 2023” to issue a report on its own oversight and regulation of SVB following a “comprehensive review.”
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com.
I came across the link to the DFS report in a post from a law firm rounding up the various postmortems to date.
The report also notes that attrition has been a factor in staffing shortages, and points out in a footnote that this includes attrition from the DFS to “federal financial regulators who pay on average 30 to 50 percent more for similar roles.”
For example, from Michael Barr’s cover letter accompanying the Federal Reserve Board’s SVB report: “we should re-evaluate the stability of uninsured deposits and the treatment of held to maturity securities in our standardized liquidity rules and in a firm’s internal liquidity stress tests.”