If the FDIC had treated Signature Bank as a routine bank failure, it would have been resolved without a penny of cost for the FDIC deposit insurance fund. Under normal rules, all losses would have been borne by the uninsured depositors as required by the FDIC Improvement Act of 1991 which generally requires the FDIC to carry out resolutions in a manner that imposes the least cost on the deposit insurance fund.
Instead of large depositors taking a loss, the U.S. Treasury, the Federal Reserve and the FDIC choose to declare Signature Bank a “systemic risk” to the financial system so they could perform a more costly resolution. The Signature Bank resolution will cost the FDIC fund at least $2.5 billion instead of nothing. Other banks, and ultimately taxpayers, will pay for Signature Bank’s insurance fund losses, losses that were a direct result of regulatory neglect.
If the Signature failure was treated as a routine bank failure, it could have been resolved without imposing any cost on the FDIC deposit insurance fund. When it failed, the bank likely had about $75 billion in assets funded with at most $5.5 billion in fully insured deposits and $6.8 billion in deposit insurance fund liability for the 27,228 accounts with balances in excess of the $250k FDIC insurance limit. The $6.8 billion estimate overstates the insurance fund’s liability because roughly $21 billion in uninsured deposits likely ran before the bank was closed.
Signature Bank’s year-end regulatory reports show a little more than $110 billion in assets funded with about $89 billion in deposits, of which about $83.5 billion were held in accounts with balances in excess of the $250k FDIC insurance limit. According to the New York Times, Signature Bank was known “for catering to wealthy families in the area.” The average balance in the banks’ deposit accounts over the insurance limit was about $3 million.
On March 20, The FDIC consummated a deal that transferred $38.4 billion in assets and liabilities from the Signature Bank receivership to Flagstar Bank. The assets reportedly included $25 billion in cash, $13 billion in loans, and 40 branch offices. Based on Signature Bank’s December 31 regulatory reports, the value fixed assets transferred was $0.4 billion. The value of receivership assets transferred in the sale were reportedly discounted by $2.7 billion relative to the carrying value previously reported on Signature Bank’s balance sheet.
In return for this transfer of assets and liabilities formerly owned by Signature Bank, the FDIC received common stock that potentially could be worth $300 million. In the Flagstar deal, the FDIC reportedly retained $60 billion dollars of the failed Signature Bank assets and about $4 billion in crypto-firm related deposits in the receivership.
When the FDIC sells the remnants of a failed bank, it transfers deposit accounts to an acquiring bank. Deposits are a liability for the acquiring bank, and to offset this liability, the FDIC transfers an equal value of deal-specific assets from the receivership to the acquiring bank.
At year-end, Signature reported owning about $6 billion in cash and $26 billion in securities. $11 billion of the bank’s securities were pledged as collateral for Federal Home Loan bank advances, leaving the bank with $15 billion in securities eligible for Home Loan Bank advances or Fed discount window loans. These securities do not appear to have been transferred to Signature Bank’s receivership. Likely they were used as collateral to borrow from the Home Loan Bank or the Fed before Signature failed. If this is the case, Signature Bank experienced a run of less than $21 billion prior to its failure considering market value discounts and haircuts lenders apply to loan collateral.
On December 31, Signature Bank owned about $74 billion in loans and lease assets, and according to the publically disclosed details of the Flagstar deal, it owned about the same amount at the time it was shuttered. So, before it failed, Signature Bank had apparently not used its loans or leases as collateral to borrow to fund its depositor run.
Using $21 billion as an upper-bound estimate of the size of the pre-failure run, about $68 billion in deposits should have initially been transferred to the Signature Bank’s receivership, including $16.5 billion in crypto-related deposits. According to publically available information, the receivership only owned about $42.4 billion in deposits at the time of the Flagstar deal. If true, $25.6 billion in fully-insured deposits, including $12.5 billion in crypto-related deposits, were withdrawn from the receivership after the imposition of a blanket deposit insurance guarantee.
The systemic risk exception blanket guarantee allowed $25.6 billion in deposits to run, most of which were above the FDIC insurance limit and would have normally taken losses in Signature Bank’s resolution. Flagstar bank acquired $38.4 billion in deposits transferred without any losses. The receivership retains $4 billion in crypto-business deposits, most over the insurance limit, and all fully protected from loss.
The FDIC estimates that the Signature Bank “systemic risk exception” will cost the deposit insurance fund $2.5 billion. This estimate is likely low considering that the FDIC has already lost $2.7 billion in receivership assets that it transferred to Flagstar as part of the deal. Moreover, the receivership is still stuck with $60 billion in dodgy assets that no one has stepped forward to buy.
To put the FDIC’s $2.5 billion Signature Bank insurance fund loss estimate in perspective, when the FDIC closed IndyMac in July 2008, the bank had about $32 billion in difficult to sell assets. When it sold off IndyMac’s deposits, the FDIC estimated that its insurance fund losses would be between $4 and $8 billion. The actual cost to the deposit insurance has been more than $12 billion.
If the FDIC had followed its normal resolution policies, taxpayers would not now be facing the pass-through cost of higher bank deposit insurance premiums banks will pay to cover Signature’s FDIC insurance fund losses. Instead, the administration’s choice to invoke a “systemic risk exception” and guarantee all of Signature Bank’s depositors has allowed roughly $68 billion of uninsured deposits to run and transfer losses they should have absorbed on to taxpayers. The blanket guarantee increased substantially the FDIC insurance fund cost of resolving Signature Bank.
