Signature Bank

Signature Bank was a full-service commercial bank founded in 2001, headquartered in New York City. It carved out a successful niche by focusing on privately owned businesses, their owners, and senior managers, offering a high-touch, single-point-of-contact service model. However, it is most remembered for its aggressive and ultimately fatal pivot into the cryptocurrency industry. This deep exposure, combined with a classic bank run triggered by the collapse of Silicon Valley Bank, led to its spectacular failure in March 2023. Regulators, led by the Federal Deposit Insurance Corporation (FDIC), seized the bank to prevent a wider panic. The story of Signature Bank serves as a dramatic modern-day fable for investors, highlighting the perils of concentration risk and the brutal consequences of mismanaging interest rate risk in a rapidly changing economic environment.

For most of its existence, Signature Bank was a well-regarded, if unremarkable, institution. Its model was built on relationships, not risky bets. It grew steadily by poaching teams of experienced private bankers from larger rivals and giving them the autonomy to serve their clients. The strategy was simple and effective: provide excellent service to wealthy individuals and stable businesses like law firms and real estate management companies. This “boring” approach built a solid deposit base and a profitable enterprise.

The bank's character began to change dramatically in 2018 when it decided to court the burgeoning cryptocurrency industry. It saw an opportunity to serve crypto exchanges and companies that were being shunned by traditional banks. The crown jewel of this strategy was the Signet platform, a proprietary, blockchain-based digital payments system that allowed approved commercial clients to transfer U.S. dollars between themselves 24/7. For a time, this was a masterstroke. Signet attracted billions in low-cost deposits from crypto firms, fueling explosive growth. The bank's stock soared, and it became known as one of the most “crypto-friendly” banks in the United States. However, this strategy tethered the bank's fate to one of the most volatile markets in the world.

The end came with breathtaking speed. When Silicon Valley Bank collapsed on Friday, March 10, 2023, a wave of panic washed over the U.S. regional banking sector. Depositors, spooked by SVB's similar profile of serving a concentrated, tech-focused client base, began to question the stability of other niche banks. Signature Bank, with its heavy crypto exposure, was at the top of the list. That weekend, customers rushed to withdraw their funds. The bank suffered a catastrophic run, losing billions in deposits in a matter of hours. The underlying problem, which it shared with SVB, was a balance sheet loaded with long-term bonds. As the Federal Reserve had aggressively raised interest rates throughout 2022, the market value of these bonds had plummeted, creating massive unrealized losses. During the bank run, these paper losses threatened to become very real as the bank might have had to sell these bonds at a loss to meet withdrawal requests. Fearing a wider contagion that could threaten the financial system (systemic risk), regulators stepped in and closed the bank on Sunday, March 12.

The collapse of Signature Bank offers several timeless lessons, particularly for those following a value investing philosophy that prioritizes safety and predictability.

Signature's pivot to crypto was incredibly profitable on the way up but devastating on the way down. When investing in a bank, or any company, look at its customer base.

• Is it diversified across many stable industries? (A good sign).
• Or is it heavily reliant on a single, trendy, and volatile sector? (A major red flag).

A business whose fortunes are tied to a single industry is inherently more fragile than one with a broad and varied clientele.

For a bank, the balance sheet is everything. Signature's downfall was written in its portfolio of long-term government bonds. While these assets seemed “safe,” their value was highly sensitive to interest rate changes.

1. The takeaway: Always scrutinize a bank's holdings. Pay close attention to the duration of its bond portfolio and the scale of any unrealized losses. These are not just accounting footnotes; they are a direct measure of the bank's vulnerability to economic shifts.

While regulators protected all depositors (even those above the $250,000 FDIC limit) to stabilize the system, they did not protect shareholders or bondholders. This is a crucial distinction.

• Common and preferred stock investors were completely wiped out.
• The government's primary goal is to maintain financial stability, not to bail out investors who made a risky bet.

Never assume the government will save your investment. The goal of a value investor is to find businesses that don't need saving in the first place.