Former NYDFS Superintendent Reacts to Signature Bank Shutdown

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Reuters reporting that the FBI wants a bid submitted by today for banks interested in buying up the assets of crypto friendly bank signature in Silicon Valley Bank. Joining us now with more reaction to signature bank shutdown is former New York Department of Financial Services superintendent Maria Vlo NDFS is the state Banking and financial services regulator overseeing all crypto companies. So Maria, welcome to the show. Uh Let's start off with Good morning. Let's start off with former congressman Barney Frank. Now he's made some comments. He was one of a signature banks board members and he thinks signature shutdown could be politically motivated against the crypto industry. But the New York regular later is pushing back saying that in a new statement sent to coin desk uh that the bank failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank's leadership. So I wonder how you square those differing comments well, easy to square them because they're the opposite sides of the debate. Uh But uh look, I I don't believe that the decision to shut down signature bank was because it banked crypto clients. I think the decision was based upon whatever the data was with respect to the the the withdrawal by customers and signature may also have suffered the consequences of contagion risk that was going on following the failure of Silicon Valley Bank. And, and look, I think, you know, the former congressman has his point of view, perhaps trying to deflect from, you know, the other things that were going on. And I thought what was also interesting was that he gave an interview yesterday and he said that the regulator um, admitted that Signature Bank was not insolvent, but that's actually not the test. They, they ran out of money and you could be solvent and run out of money because for a bank, your assets are loans that are not liquid. So they ran out of money. And I think that's likely the reason that the bank, unfortunately, um, was taken over. So, uh a couple of things about this and Good morning Maria, good to see you. Good to see you. Yeah. So, um we have, uh uh as you said, it's uh it was uh insolvent but it, or rather it had the money or it was solvent, but it, it didn't have the money perhaps were there any indications when, when, at least when you were at DFS that there were there any uh ways in which uh risk management was, was looked at, um, there was there any indication that this could be a problem in a rising interest rate environment? That seems to be a common theme going on that, that all these guys were caught flatfooted with, with long durations and that, that this was something that they didn't see. But yet we regulators on top of it to say, hey, uh guys, you know, you have three year duration, four year durations on bonds that are, you know, losing value every time the fed raises rates, cut it back to, you know, a as low as you can or, you know, was that something that regulators just generally didn't think about or, or had to think about? Well, look, uh regulators always think about risk management and certainly credit risk is one and interest rate risk is one aspect of it. And that's clearly what happened with Silicon Valley Bank and perhaps also with Signature Bank. Um you know, and it's um uh you know, I I left DFS in January of 2019 and so the rise, it was pre-covid and the rising interest rate environment um did not exist. And also signature was a much smaller bank when I left. Um So, you know, it grew, you know, more than double uh since that time, but it also had a more diversified portfolio than say, I would say, you know, Silicon Valley. But I do think what the two banks have in common is that they depositors were about 90% uninsured, which creates a risk that in the event of any possible turmoil, even a hint of it, depositors go fleeing. Um And I think that's what happened, but on the interest rate question, certainly, you know, not only regulators but the bank and with Silicon Valley Bank, they had a tremendous this portfolio that was unhedged. They did and they actually terminated their hedges and that is very poor risk management. And apparently the Chief risk Officer left last April. Uh so there are a number of factors here but certainly the mismatch would, I would say in the interest rates was a contributing factor among others. Maria, I'm wondering about the timing of it all. So signature was shut down on a Sunday lumped in with the fed statement saying that, you know, they're saving Silicon Valley Bank and signature by the way, but people are scratching their heads because like why signature and not say first Republic, which was arguably having more problems at the time where signature was saying that they were solvent and ready to open for withdrawals on Monday, right? But again, so look, I I don't think any of, well, certainly none of us knows all the facts and with banking, especially right bank examinations and all that data is confidential and the regulators have that. So none of us really knows all of that. But I think the timing here is quite significant because you had Silicon Valley, you know, uh, taking over, you know, late morning, depending upon which, you know, coast you were on east or west. But, um, you know, on Friday and the initial, you know, announcement was not that all depositors were gonna be taken care of by the governor. What, by the government when, um, Silicon Valley was first put into sea shifted and that changed over the weekend and it, and, um, but also over the weekend there was information where depositors were certainly in process, uh, putting in withdrawals, uh, you know, they couldn't actually get them out over the weekend, but it was in process. And I thought it was also interesting that Barney Frank yesterday admitted that their data was sloppy. Now, that is a real telling admission. So which seems consistent with dfss position that they weren't getting good data, but certainly the contagion risk of what might happen on Monday morning I would think was in the regulator's minds and certainly in Washington because of all of the bank data that they had from many different banks across the country, you know, not obviously just in New York or California where they might have seen, you know, other significant risks of, you know, so if the markets on Monday open, the banks had to then satisfy withdrawal with withdrawals, would there be significant contagion? And I think, you know, we don't all know, but it seems to me they made the right decision to deal with these two banks and send a very strong message to the public that the system is ok and that we're going to take care of depositors and that latter statement was important so that depositors didn't continue to pull out their money from other banks. It may be fortunate by who's involved, right, signature or whatever. But it seems to me, you know, these are judgment calls and it's always easy to quarterback and who knows what would have happened Monday morning. Had they not done that? Nobody knows for sure on those, on those judgment calls. So the FDIC also is denying this Reuters report saying that buyers must agree to give up the bank's crypto. And so there is this conversation about, you know, whether or not this was singled out because of their crypto or do you think? And it sounds like this is your what you're thinking now, it was because of the leaders, it was because of the mismanagement. It was a banking problem. I don't think that they, uh uh first of all, from a you, you cannot close down a bank because of a policy reason and it, it and I just don't think that, you know, despite what it, you know, there might be people that certainly think that banking crypto uh companies is riskier from a policy perspective. You can't close down a bank because of that. Now, you know, banking, certain types of customers could be riskier. And I would say again, going back to Silicon Valley Bank, they had lots of other tech companies and they had concentration risks way beyond crypto companies. Um And so, you know, I think it's uh you know, because those industries or those tech companies, the valuations were dropping their customer, you know, so there was a lot of risk of withdrawals and all those other businesses. And I would say, you know, if you were banking, the restaurant industry in 2020 during COVID, you were a risky bank. So, you know, it, you can't really just close it down because of that, but it might have been because there were withdrawals in certain industries, including perhaps crypto that, um, or that, you know, in, in their other, uh, you know, across the bank, uh, risks and their risk management could have caused this problem. And, and again, I think it's the uninsured deposits aspect of these banks that really, um, created the problem. So we, uh, yesterday we had, uh, Brian Brooks who was the former, uh, acting controller at the OCC. He, um, he, he seemed to believe that this was coordinated from the, from the White House or at least somebody perhaps in treasury. Uh, you, you think that, but that it was because of crypto that this, you know, they, they're calling it operation choke 0.2 0.0 do you think that that's feasible that this was done specifically? You know, again, he, he thinks that it's, uh, that, that's the reason you, you say that they probably didn't. But nonetheless, do you think it's possible that they could have done it? No, I don't think for a policy reason that they said we're gonna close down this bank because we want to send a message to the crypto industry. I don't believe that, but to the extent that there were withdrawals or something from Cryptocurrency customers that created part of the risk. I don't really, you know, again, don't know who the customers that were withdrawing funds that created the issue, the coordination from the White House, you know, it was all part of the triggering of the systemic risk exception, which the Treasury Secretary had to do. And I believe that certainly they wanted to stem the tide of um you know, of, of contagion risk in the greater banking industry. Now, I think it's justifiable to, to ask, you know, why weren't other things done perhaps to save signature bank, like what's being done with First Republic? I think those are valid questions to raise. But I, you know, and, and so, but I don't think, you know, you close down the bank because of a policy reason you do because it's risk management or its financial picture is unsafe and unsound. And it seems to me that at that point in time, a good argument can be made that it was unsafe or unsound because it lacked cash, ran out of money to, to pay the withdrawals from the depositors. Right. Maria? Well, we thank you for your insights this morning. That was, we gotta wrap it there. That was Maria Vlo, former superintendent of the New York State Department of Financial Services.