The unexpected closure of Signature, the last crypto-friendly bank in the United States, will have an impact on the crypto market?

Original article: “Analysis of Signature, the Last Encryption-Friendly Bank in the U.S., Was Unexpectedly Closed by Regulation and Market Impact Analysis”

On the evening of March 12th, Eastern Time, the U.S. Department of the Treasury announced that the New York State Financial Supervisory Authority would close Signature Bank, and customer deposits could be withdrawn on Monday. The biggest similarity between this and the other two banks that have recently collapsed, Silvergate Bank and Silicon Valley Bank, is that they are both involved in the encryption market business. Signature Bank, as the only bank that temporarily survived the liquidity crisis caused by the emergency run of customers, was temporarily closed by the regulator, which caused an uproar in the market. So, what exactly caused Signature Bank to be suspended by regulation, and what is the follow-up trend of the market? This article will analyze the possible reasons behind it and its impact on the market based on the information that has been disclosed.

Signature Bank (SBNY) was established in 2001. Its main business is to provide private banking services for high-net-worth individuals. Since the first quarter of 2018, SBNY has added encryption business services, including regulated stablecoin issuers, exchanges, and custodians. , cryptocurrency miners, institutional traders, etc. provide access to fiat currency banking services. According to the disclosure in the annual report of the previous year, by the end of 2022, the total assets will be US$110.3 billion, and customer deposits (liabilities) will be US$88.5 billion.

From the perspective of liabilities, in the fourth quarter of 2022, after the FTX thunderstorm incident, the management of SBNY intentionally reduced its risk exposure in the encryption business, took the initiative to reduce the proportion of business, and reduced customer deposits by US$12.39 billion. In Q4, crypto customer deposits were $17.7 billion, accounting for 20% of all customer deposits. Judging from the analysis of the concentration of the bank’s balance sheet, the proportion of this business is relatively reasonable. From the perspective of the scope of business provided, SBNY does not invest in, hold, or manage cryptocurrencies. It is limited to the US dollar deposit business, and can conduct 7*24 real-time US dollar transfer transactions through the Signet system built by SBNY. Unlike Silvergate Bank, SBNY does not provide loans with cryptocurrency as collateral, and is relatively conservative in its business direction. At the beginning of this month, according to the financial data disclosed by SBNY in the first quarter of 2023, all customer deposits fell by US$826 million. The decline in deposits was mainly due to a decrease of US$1.51 billion in customer deposits related to crypto assets, and other new deposits of US$682 million. On the one hand, this is due to the fluctuations in the cryptocurrency market itself; on the other hand, SBNY has stepped up efforts to control the overall proportion of crypto business deposits.

From the perspective of assets, the asset adequacy ratio data disclosed by SBNY shows that the core tier-1 capital adequacy ratio is 11.20%, the risk capital adequacy ratio is 12.32%, and the leverage ratio is 8.79%, which meets the requirements of Basel III for bank risk assets. at a relatively healthy level. From the perspective of asset details, short-term investment is 17.4 billion US dollars, accounting for 14.98%. In extreme cases, liquidity can be satisfied even if all crypto deposits are applied for withdrawal.

Asset of Signature Bank, Q4 22

From the perspective of business health, if Silvergate Bank is a “bad student” with an aggressive risk appetite, then Signature Bank can be regarded as a “good student” who abides by regulations and adjusts its business focus in a timely manner when market trends change. Therefore, from the perspective of business analysis, Signature Bank will not directly cause the risk of a liquidity run due to the impact of the cryptocurrency market. However, at this time, the U.S. Department of the Treasury, seeing Silvergate as the most radical encryption-friendly bank, has a bad impact on the market in the context of interest rate hikes, and decided to close the business of Signature Bank conservatively. There may be two reasons behind this : First, I am worried that the fluctuations in the encryption business will affect other business customers of Signature Bank, and then extend to the traditional banking market. After all, the overall business volume of SBNY is not small; From the point of view of the SEC and CFTC’s continuous proposals to formulate regulatory rules for the encryption industry, this may be a sign of punishment for banks that have already involved in encryption business, and a signal that the regulator will introduce a more comprehensive and prudent regulatory framework. In the future, all encryption will inevitably be involved. Complete, in-depth, reasonable and powerful regulatory measures have been introduced for every link between the market itself, the encryption market and the traditional financial market.

Regarding Silvergate Bank and Silicon Valley Bank, I wrote in my previous report (https://twitter.com/WuWei_BeWater/status/1632417472015142912) that both are under the background of interest rate hikes, with unstable deposits on the liability side and long-term debt on the asset side. Under the double effect of floating and losing, customers do not trust the liquidity crisis caused by a large number of runs. Therefore, there are also rumors in the market that the Federal Reserve’s FOMC meeting to raise interest rates this month is likely to slow down the rate hike. The probability of a 50bp rate hike has now dropped to 0, and the US stock futures market has risen slightly. Trust, bringing the encryption market up over the same period. However, at a time when encryption regulatory measures are still undetermined and CPI data is about to be released, it may be too early to judge that the encryption market will “turn back”.

References:

Signature Bank 2022 Annual Report: https://investor.signatureny.com/pme/press-releases/news-details/2023/Signature-Bank-Releases-2022-Form-10-K/default.aspx

Signature Bank 2023 first quarter report: https://investor.signatureny.com/pme/press-releases/news-details/2023/Signature-Bank-Issues-Mid-Quarter-Financial-Update-for-Its-2023- First-Quarter/default.aspx

disclaimer

All content contained in this article is for reference only and does not constitute investment advice to anyone. The sources of the information contained herein are believed to be reliable, but do not guarantee its accuracy or completeness, nor guarantee that the information and advice contained will not be subject to any change, and no liability for any direct or indirect damages or any other damages related thereto.

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