FDIC and Federal Reserve officials are investigating the collapse of Silicon Valley Bank and Signature Bank, two prominent banks in the digital assets industry, and are seeking to hold their top officials accountable for their mismanagement and dangerous business concentrations. The Federal Deposit Insurance Corp. is looking to hold the banks’ leaders accountable for the losses they caused to the banks and their misconduct in their management.
This news comes as the FDIC put itself on the hook for an expected $22.5 billion hit to its insurance fund, mostly to cover uninsured deposits.
FDIC Chairman Martin Gruenberg and Federal Reserve Vice Chairman for Supervision Michael Barr both detailed the mismanagement and dangerous business concentrations in the banks’ collapse, particularly in digital assets at Signature Bank. Gruenberg said in written remarks for a U.S. Senate hearing that top officials from the banks will face scrutiny “for the losses they caused to the banks and for their misconduct in the management of the banks.”
The implosion of crypto-focused Silvergate Bank was also detailed in Gruenberg’s testimony. While Signature was more well-rounded than Silvergate, with only one-fifth of its deposits from the digital-assets industry at the end of 2022, it still experienced deposit withdrawals and a drop in its stock price due to disruptions in the digital-asset market caused by several high-profile digital-asset companies’ failures.
Silvergate, which was almost entirely reliant on the crypto sector, executed an unusual self-liquidation that spared the FDIC from taking it into receivership, unlike the two larger institutions. Silicon Valley Bank was a “textbook case of mismanagement,” according to Barr, and its government minders were well aware it had serious problems. The supervisors found issues with its liquidity management in 2021 and an array of problems with board oversight, risk management, and internal auditing in 2022.
The bank’s supervisors from the Fed met with managers from the bank five months ago to let the managers know their interest-rate risks were unacceptable, and they brought those concerns to the Fed’s Board of Governors last month. However, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9.
While the FDIC and Fed conduct their reviews of what went on inside the banks, the regulatory agencies are also reviewing their own actions in the run-up to two of the largest banking failures in U.S. history. Gruenberg’s FDIC will also be trying to figure out how to replenish the damage to what had been a $128 billion insurance fund.
The collapse of the two banks raises questions about the role of digital assets in the banking industry and the need for proper risk management and oversight. The banking industry must learn from these collapses to avoid similar situations in the future. The regulatory agencies must hold the banks’ leaders accountable for their mismanagement and ensure that the insurance fund is replenished to prevent further harm to depositors.