On 12 March 2023, Signature Bank, which was based in New York, was closed by banking regulators in the USA. Its closure happened in the wake of Silicon Valley Bank’s high-profile collapse just a few days prior. Silicon Valley Bank was dealing with a flood of deposit withdrawals that it could not handle. After regulators assumed control of Silicon Valley Bank, it was revealed that depositors tried to withdraw US$42 billion – around a quarter of the bank’s total deposits – in one day.
Signature Bank was by no means a behemoth, but it was definitely not small. For perspective, the US’s largest bank by assets, JPMorgan Chase, had total assets of US$3.67 trillion at the end of 2022; Signature Bank, meanwhile, reported total assets of US$110 billion. But what is fascinating – and shocking – about Signature Bank’s failure is not its size. It has to do with its board of directors, one of whom is Barney Frank, a long-time politician who retired from American politics in 2012.
During his political career, Frank was heavily involved with reforming and regulating the US banking industry. From 2007 to 2011, he served as Chairman of the House Financial Services Committee, where he played an important role in creating a US$550 billion plan to rescue American banks during the 2008-2009 financial crisis. He also cosponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010. The Dodd-Frank act was established in the aftermath of the 2008-2009 financial crisis, which saw many banks in the USA collapse. The act was created primarily to prevent banks from engaging heavily in risky activities that could threaten their survival.
Although Signature Bank was able to tap on Frank’s experience for the past eight years – he has been a director of the bank since June 2015 – it still failed. An argument can be made that Signature Bank was engaging in risky banking activities prior to its closure. The bank started taking deposits from cryptocurrency companies in 2018. By 2021 and 2022, deposits from cryptocurrency companies made up 27% and 20%, respectively, of Signature’s total deposit base; the bank was playing with fire by having significant chunks of its deposit base come from companies in a highly speculative sector. The key takeaway I have from this episode is that investors should never be complacent about the capabilities of a company’s leaders, even if they have a storied reputation. Always be vigilant.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Ser Jing does not own shares in any of the companies mentioned.