New Yorkers woke up Monday to the news that a bank most had never heard of was suddenly closed by state regulators, its deposits guaranteed by the federal government, its stockholders’ investment wiped out and its executives sent packing.
Greg David, The City
The collapse of Signature Bank is a story of an institution that succumbed to the allure of the cryptocurrency boom and then got swept up in the collapse, just days earlier, of Silicon Valley Bank, another regional bank that boomed by serving the tech industry.
But while the crisis over this past weekend will have no impact on the vast majority of New Yorkers, it could have worrisome ramifications for the city’s real estate market, where the bank was a major lender to developers and landlords, especially those that owned rent-regulated buildings.
“They are essential for a vast majority of the rent-stabilized landlords,” said Jay Martin, executive director of the Community Housing Improvement Program, which represents those owners.
History and Importance
Signature opened its doors in spring 2001, the brainchild of Joseph J. DePaolo — the bank’s president and chief executive officer — and colleagues who had left another regional New York bank when it was acquired by Hong Kong-based HSBC. Its founders decided to ignore consumer banking, instead focusing on attracting the banking business of small and mid-sized companies and real estate firms.
The strategy succeeded, and in 2014 Crain’s New York Business called Signature “New York’s most successful bank.”
Signature became a key banker for lawyers, accountants, healthcare companies and others. The bank built its business on relationships developed by its bankers rather than the kind of automated and digital lending the biggest banks now emphasize.
For example, noted real estate lawyer and former City Council member Ken Fisher has been banking at Signature since the day it opened, when his longtime banker joined the then-startup.
While it serves many kinds of businesses, its lending has been concentrated in real estate, with an estimated $35 billion in real estate loans, many in New York and with a disproportionate share of medium-sized and small rent-regulated buildings.
The Allure of Crypto
With cryptocurrencies soaring in the last several years and banks unwilling to deal with crypto financial companies and investors, Signature seized the opportunity. It became a place where crypto companies deposited their cash and the bank’s deposits soared from $40 billion in 2019 to $106 billion in 2021.
The move seemed like another big success as the price of Bitcoin, the most well-known cryptocurrency, soared to $60,000 in late 2001. But then the price plunged to only about $16,000 and crypto financial companies including FTX collapsed, leading to a major loss of deposits for Signature. With fewer deposits to lend, Signature was forced to cut back on lending.
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In the Spotlight
Silicon Valley Bank’s financial troubles were not widely known before its collapse. It, too, saw an influx of deposits when tech companies and venture capitalists were awash in money during the pandemic. It put much of that money into ultra-safe government bonds.
But when the tech sector began to contract last year, companies withdrew their money to fund their businesses. Meanwhile, the value of the bonds declined because the Federal Reserve had sharply increased interest rates, forcing SVB to admit to large losses.
When shareholders and depositors saw the size of the losses, they began a classic run on the bank to get their money back, causing SVB to become insolvent.
Unlike SVB, Signature’s problems with crypto have been well covered in recent years. As recently as earlier this month, Signature increased its dividend and bought back shares from its current stockholders to demonstrate its financial strength. But with SVB imploding, companies with money at Signature feared a similar run on the bank. They began trying to withdraw their money on Friday, leading banking regulators to seize the bank.
Fisher, for example, said he started the process of moving money to other banks by opening certificates of deposits last week. But the process wasn’t completed by the time the bank was seized.
The federal government insures all deposits up to $250,000. As in the case of SVB, the government has guaranteed all deposits, even if they exceed the legal maximum. No one knows how seamless the transition will be.
“I am going to an ATM later today to see if I can get any money out,” said Fisher.
The shareholders at Signature have been wiped out and the top executives have lost their jobs. CEO DePaolo, who was planning to retire later this year, owned about 200,000 shares, which were worth about $73 million at the stock’s peak and $14 million on Friday.
The federal government has set up a new entity, Signature Bridge Bank, to keep banking services operating for customers. Crucial are bank letters of credit, which essentially provide an automatic lending option like a home equity loan. Signature was one of the few banks providing such letters in New York, says Eric Orenstein, an attorney at Rosenberg and Estis. He worries that the successor bank won’t honor the letters of credit and wonders what banks might step in to fill the void.
Orenstein also notes that the relationships customers had with their Signature bankers could erode and, if a building got into a financial squeeze, the new bank might not be as willing to provide financial relief to the borrower. In a worst-case scenario, that could lead to a default on the loan.
Higher interest rates, tougher standards for making loans and pessimism about the outlook for rental buildings — especially those where rent increases are limited by 2019’s rent regulation reforms — have already made borrowing more difficult for rental building owners, says Fisher.
With less competition, lenders will be able to charge more for loans, as owners seek to refinance loans that have become due or buy new properties.
New York Community Bank is regarded as the major alternative to Signature, said real estate experts who did not want to be identified. Orenstein, the attorney, said he was watching to see which, if any banks, hire the major real estate teams from Signature.
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