New York Department of Financial Services Signature Bank Report (committee summary)

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New York Department of Financial Services Signature Bank Report

Background: On April 28, 2023, the New York Department of Financial Services (NYDFS)
issued its report examining the events that led to Signature’s failure and identifying opportunities
to improve DFS’s supervisory process. On Sunday, March 12, 2023, NYDFS took possession of
Signature Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

Report Themes: Signature Bank experienced rapid growth that outpaced the development of its
risk control framework:

•   Liquidity risk management deficiencies were identified in NYDFS and FDIC exam reports
    issued in 2018 and 2019, both as matters requiring board attention and supervisory
    recommendations.
•   Examiners downgraded Signature Bank’s liquidity component rating from a 2-Satisfactory to
    a 3-Fair, which is a less than satisfactory rating.
•   In September 2022, Signature Bank represented that it had remediated certain liquidity risk
    management deficiencies. However, exam work that remained in progress at the time of
    failure indicated the firm had failed to remediate the deficiencies. Examiners were
    considering adding an additional matter requiring board attention related to liquidity.

Signature Bank’s ‘association’ with cryptocurrency was not a contributing factor to the firm’s
failure:

•   The percentage of digital asset customer withdrawals on March 10, 2023, was relatively
    proportional to the percentage of digital asset customers in the deposit base overall.
•   Instead, NYDFS concluded that the “bigger issue for Signature was that the Bank had a high
    concentration of uninsured deposits and was perceived as a crypto bank. In that sense, it was
    closely associated with Silvergate and [Silicon Valley Bank], the latter of which was another
    bank with a high concentration of uninsured deposits that was associated with the broader
    technology and innovation industry.”

There is room for improvement with respect to NYDFS’s bank supervision, including increasing
staffing and improving escalation processes.
.
NYDFS Recommendations: Based on the results of the review, NYDFS identified the
following necessary improvements to its bank supervisory process:

•   Update policies and procedures. Signature Bank’s collapse underscores the speed at which
    the modern financial system moves. Inefficiencies led to delays in issuing examination
    findings to the firm. NYDFS’s policies and procedures need to be updated to insure that
    NYDFS addresses risks at banking organizations in real-time.
•   Rebuilding examination capacity. Internal staff constraints limited NYDFS’s ability to staff
    examinations adequately. While Superintendent Harris has hired over 200 people in 2022,
    NYDFS still has more work to do to rebuild its examination capacity. Additional staff would
    help to close the timing gap between the end of examinations and the issuance of Reports of
    Examination and Supervisory Letters.
•   Operational stress testing. Signature Bank struggled to provide timely and accurate
    information to their banking supervisors on liquidity and outgoing wire requests over the
    weekend of March 10th. NYDFS will 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.
•   Escalating regulatory issues. Signature Bank failed to address key concerns fully and in a
    timely manner while it was rapidly expanding its business operations. NYDFS’s internal
    processes need clearer guidelines for when examiners need to escalate regulatory concerns or
    instances in which a bank fails to remediate findings in a timely fashion. DFS will establish
    clear escalation procedures to address repeat regulatory findings.
•   Liquidity risk modeling. Signature Bank’s rapid collapse underscores the need to revisit the
    assumptions used to model and manage liquidity risk. Both the type of depositors who
    initiated funs and the speed at which they initiated withdrawals far outpaced assumptions
    many institutions used for modeling liquidity risk. In addition, the assumptions about bank
    customer behavior codified in the liquidity coverage ratio regulation may need to be
    reconsidered.
•   Strengthen regulatory tools. NYDFS will work to identify and develop appropriate
    regulatory tools to hold executives accountable for misconduct that leads to the failure of a
    banking organization and to address the dissemination of inaccurate information that provoke
    bank runs.

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