Signature Bank’s Quick Sale Leaves Crypto Customers In The Lurch, FDIC $2.5 Billion Poorer

The U.S. takeover of Signature Bank and the ensuing sale of most of its operations to a local rival was accomplished with blinding speed, as such transactions go, but the only interested party that seems likely to walk away a clear winner is the buyer, New York Community Bancorp
NYCB
(NYCB), which is not putting up any cash.

Among the issues:

• The future of Signature’s crypto operations—the part of the business not included in the transaction—seems to be in doubt. Just weeks ago, the bank’s Signet platform was the second-most-used interface between the crypto and traditional-banking worlds.

• The FDIC estimates the affair will cost its Deposit Insurance Fund $2.5 billion.

• Other community banks are unhappy about the favorable terms for Signature Bank depositors financed by their contributions to the FDIC insurance fund.

Signature’s crypto division will remain with the FDIC-owned Signature Bridge Bank, and that includes Signet, a blockchain platform used by digital-assets companies for instant commercial transfers. With the decision by rival Silvergate Bank to wind down its business earlier this month, crypto businesses likely will have to find new partners from a fragmented market of much smaller competitors. The FDIC has not revealed its plans for Signet or the other Signature crypto operations.

The leading U.S. crypto exchange Coinbase
COIN
announced it will no longer support Signet, the Wall Street Journal reported, leaving users without a way to transfer cryptocurrencies outside of traditional banking hours, a blow to the 24/7 digital asset trading market.

Signet was built by technology provider Tassat, which has sold the same product to smaller banks including Customers Bank, Western Alliance, Byline and Cogent. Cross River Bank, which does not have a real-time, round-the-clock payment service but has a banking relationship with Coinbase, has picked up business from key crypto industry players like stablecoin issuer Circle since Signature failed.

These networks require the sender and the receiver in a crypto transaction to hold deposit accounts with them. To replace Silvergate and Signature, any bank interested in entering the business needs to bring in a critical mass of crypto participants to create a useful network.

“I don’t know who is going to win this one, and we’re going to want to adopt whoever wins,” Michael Safai, co-founder of quantitative trading firm Dexterity Capital, says. “It’s really important to us to be able to move funds off-hours, instantly without operational overhead.”

The exclusion of Signature’s crypto operations from the NYCB deal seems to support the statement by Barney Frank, a Signature board member and former U.S. Congressman, that regulators are sending a message to other banks not to deal in crypto.

In addition to leaving crypto deposits behind, NYCB did not pick up $11 billion in undesirable commercial debt for rent-stabilized apartments in New York City or the failed institution’s fund banking business which included $27 billion in loans to venture capital and private equity firms. “In the Great Financial Crisis, most bank failures resulted in a whole bank sale to other institutions,” says Mark Fitzgibbon, equity analyst at Piper Sandler & Co.

NYCB’s acquisition of $38.4 billion in assets will provide low-cost funding in the form of new deposits and lower the bank’s loan-to-deposit ratio from approximately 90% from 118%. After the deal was announced, NYCB raised its earnings per share estimates for 2023-2024 to $1.20-$1.35 from $1.00-$1.10. Analysts also viewed the deal favorably. Keefe, Bruyette & Woods and D.A. Davidson upgraded NYCB to a buy. JPMorgan analyst Steven Alexopoulos raised the price target to $10.50 from $9.50.

The bank’s shares soared to $9.09 on Wednesday from $6.54 last week, which will curtail the expense of the arrangement for the FDIC. The only compensation NYCB appears to have offered the agency is $300 million worth of its stock if the price exceeds $6.54 before the end of March. It would already be profitable for the FDIC to exercise that clause.

The bank said in a presentation to investors that it had acquired “a highly liquid, mostly cash balance sheet with a $2.725 billion excess asset position at no deposit premium.” The transaction included $34 billion of non-crypto-related deposits, a $13 billion pool of loans spread among several industries and $25 billion of cash from the FDIC. It will fold the Signature operations into its Flagstar division, acquired December 2022.

The estimated $2.5 billion hit to the FDIC insurance fund is a striking element of the deal. Signature Bank was shut by the New York State Department of Financial Services on March 12. Just a week later, the transaction was closed and approved by regulators within one day. Bank acquisition deals typically take months or years to consummate, but the FDIC seemed to be in a hurry to close this one on terms very favorable to NYCB.

The reasons for the charges to the insurance fund were not specified in the FDIC announcement. The New York agency cited a lack of confidence in the bank’s leadership stemming from a failure to provide consistent data in comments to multiple news outlets. It referred Forbes to the purchase & assumption agreement, which was released Wednesday, when asked about specifics of the deal.

“It would be nice for someone to explain to the public how they are spending that $2.5 billion in just one week,” Owen Lau, an analyst covering exchanges and asset managers for Oppenheimer, says. “It’s a stunning expense.”

The cost may simply be a reflection of a $2.7 billion discount on $12.9 billion face value of loans that is being included in the $25 billion cash transfer. The expense could also indicate Signature doesn’t have enough revenue to cover its expenses while under FDIC receivership.

Another possibility is the fund needed to sell some of its own securities at a loss to cover deposit outflows. That would echo the situation at Silvergate, which suffered an outflow of deposits when it decided to sell bonds it held at a loss to cover those withdrawals, a bank run that spread to Signature and Silicon Valley Bank, leading to their closures. Bond prices have declined as interest rates rise, which would not have been a problem if the securities could have been held to maturity rather than used to pay off fleeing depositors.

The backstops to depositors from the FDIC were provided because Signature, like SVB
VB
, was deemed systemically important by the Treasury, the Federal Reserve and the FDIC. This has raised ire among some other community banks, who fear they may not get away so easily if they face similar runs.

“It’s not fair to sit there and pick winners and losers,” Greg Ohlendorf, CEO of First Community Bank and Trust, says. “We’re going to protect the deposits of the largest institutions and their customers but if my community bank were to fail, it doesn’t seem like I’m going to get the same treatment. Yet I pay my fee and my check for my FDIC assessment clears every single time.”