Signature Bank bet big on crypto — and must now reckon with the crash


Signature Bank, the Thirtieth-largest financial institution in America by property, doesn’t promote and operates simply seven official financial institution branches. It was additionally considered one of the best-performing banks in the nation final yr, propelled by a call to courtroom the surging deposits of the cryptocurrency trade.

However, as crypto has crashed so too has Signature Bank’s share value, leaving it struggling to deal with issues that its speedy progress is being thrown into reverse.

Before its share value dropped by one other 10 per cent after its outcomes final week, Signature Bank’s chief govt Joe DePaolo had tried to place a ways between the uncommon establishment he has nurtured for twenty years and its latest and most controversial prospects. 

“We’re actually much more than a crypto bank,” he informed the Financial Times final month.


Critical intelligence on the digital asset trade. Explore the FT’s protection right here.

By some measures considered one of the most profitable US banks, crusing via the nice monetary disaster with out loss, additionally it is considered one of the least well-known. Its Manhattan flagship department is hidden 12 flooring up a midtown workplace tower, and the common American is extra more likely to have seen its emblem flashed on display screen on the enterprise account statements of Bad Vegan protagonist Sarma Melngailis than encounter the group. 

The secret to Signature’s success, DePaolo mentioned, is a relentless focus on progress in deposits. He and chairman Scott Shay based the financial institution 20 years in the past in New York and grew it to $109bn of deposits with out a single acquisition, focusing for a lot of its historical past on attracting profitable non-public companies and their homeowners as shoppers.

Joe DePaolo
Joe DePaolo

Operating very like a wealth supervisor, Signature grew by hiring away groups of bankers from rivals, increasing outwards from New York and then including places of work on the West Coast to focus on the enterprise capital and non-public equity scene. “Unlike just about every bank in the country, everyone who worked at Signature Bank has decided to come here,” Shay mentioned.

What helped make it final yr’s best-performing stock in the KBW Bank Index was a call 4 years in the past to simply accept crypto exchanges, stablecoin issuers and bitcoin miners as prospects, in addition to the launch of a blockchain-based funds system known as Signet that permits financial institution prospects to switch {dollars} between one another at any time of the day.

From a peak market capitalisation of $23bn, nonetheless, Signature’s worth has halved, dragging it to the backside of the index it lately topped.

“Between 2018 and today, you had a [digital assets] business that started at zero and it’s now $29bn in deposits. Crypto tends to grab the most attention these days. It’s been like a lightning rod,” mentioned Matt Breese, analyst at Stephens. 

Collapsing coin costs and a collection of bankruptcies at crypto-related corporations, together with the lender Celsius Network, the dealer Voyager and the hedge fund Three Arrows Capital, have sparked fears of a monetary disaster for the 13-year-old digital asset trade.

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Sparks flew once more for Signature this month after the group mentioned deposits dropped by $5bn throughout the second quarter — half the outflow from shoppers of its New York banking groups and half from digital property. Casey Haire, analyst at Jefferies, wrote that the drop “will increase investor angst about funding future loan growth with [the] excess cash position now exhausted”.

Signature has additionally confronted hypothesis that its speedy progress and embrace of a controversial trade might have attracted the consideration of regulators. 

The Federal Deposit Insurance Corporation maintains a confidential watchlist of drawback establishments. Each quarter it publishes the quantity and whole property of “problem banks”, which prompted a query to Signature on its April earnings name from JPMorgan analyst Steven Alexopoulos: “the assets went up $120bn, which is about your size. I’ve said publicly, I don’t think it’s you guys. But based on my conversations with investors through the quarter, there is still a concern out there.”

DePaolo responded on the name that banks aren’t allowed to remark about the listing however that if Signature was on it, “I would know, and I know nothing.”

He informed the FT that Signature holds no crypto, solely the greenback deposits of its prospects. DePaolo mentioned: “it happens to be an ecosystem that we service but we have no exposure to the digital world, or the crypto world. We had one loan that we’ve done so far and it was paid back. So we have no loans outstanding. We have no digital assets on our books.”

Questioned about the space the place Signature has quickly grown the dimension of its mortgage e book since 2018, so-called “fund lending”, DePaolo characterised it as a remarkably protected area of interest in the non-public equity trade. Signature funds capital calls to funding funds when traders reminiscent of pension funds, endowments and sovereign wealth funds lack fast money to make investments. “It’s a zero-loss business,” he mentioned.

Morgan Stanley analyst Betsy Graseck* flagged issues about crypto volatility and rising curiosity charges in a notice to shoppers: “We expect higher rates to continue to weigh on deposit growth going forward as clients seek more attractive yields, and are now expecting deposit balances to decline another $2.8bn in the second half of 2022.”

Column chart of   showing The deposits held by Signature have ballooned in recent years to over $100bn

A shrinking establishment could be a much less engaging vacation spot for the groups it hires from rivals, and a few of the issues raised in non-public by traders relate to liquidity: as Signature banks eight of the 12 largest crypto brokers, as an illustration, an implosion of the trade in a credit score crunch might see their deposits quickly evaporate. 

Signature is just not but massive sufficient to publish the liquidity protection metrics required by its greater rivals, however DePaolo mentioned the financial institution might face up to the loss of life of Bitcoin and its ilk. “Every month we model with an assumption that every single last crypto deposit is withdrawn,” he mentioned, pointing to Signature’s $20bn in marketable securities, out there credit score strains and a money place that stood at $14.6bn at the finish of June.

“The first thing we think about when we wake up in the morning and the last thing when my head hits the pillow at night is to make sure that we have plentiful liquidity and safe assets,” DePaolo mentioned. 

*This article was amended to right the writer of the Morgan Stanley report

Video: Highlights from the FT crypto and digital property summit | FT Live

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