The third biggest retail bank to fail in the United States, Signature, has been sold to Flagstar Bank, a wholly owned subsidiary of the New York Community Bancorp.

“Flagstar Bank’s bid did not include approximately $4 billion of deposits related to the former Signature Bank’s digital banking business,” the Federal Deposit Insurance Corporation (FDIC) said. “The FDIC will provide these deposits directly to customers.”

It did not include about $60 billions in loans either, which will continue to be managed by FDIC, but they did buy $38.4 billion of Signature Bridge Bank assets at a discount of $2.7 billion, leading to a loss of $2.5 billion.

The bank was closed down last Sunday following withdrawals of an estimated $10-$16 billion on Friday the 10th of March at the same time as the Silicon Valley Bank (SVB) was going under.

Unlike SVB however, which was focused on the tech sector, the New York based Signature had as its primary business advancing loans to commercial real estate entities.

That included the Trump family until 2021 when Signature broke relations following the January 6th raiding of Congress.

The bank also had numerous side businesses, including crypto and more specifically dollar stablecoins for which they provided 24/7 services.

The crypto business amounted to about $16 billion out of $88 billion in deposits, some $40 billion of which were related to commercial real estate.

Mainstream media however has nonetheless gone to some length to paint it as a crypto bank with innuendos and even suggestions that it failed due to crypto.

That was not the case. The direct causes of its failure were two: a bank run and two lenders of last resort saying no.

The bank run began with SVB revealing they needed to raise about $2 billion, with closer scrutiny then showing they had lost that much in their bond holdings, purchased with customers’ deposits.

As deposits on SVB were mostly uninsured by FDIC due to generally being in sums greater than $250,000, their clientele was quick to run, and unlike all that has been said for years, such classic bankrun was still successful in collapsing the bank.

After a decade and a half of quantitative easing that ostensibly made banking safe due to the, until recently print baby print lender of last resort with too big to fail concepts drilled in our head, that this bank run led to a collapse is a revelation.

For Signature however there’s no indication of even losses. Instead, it sharing with SVB the fact that 90% of its deposits were FDIC uninsured, its client base was also quick to run, and so what you might ask? What does people running have to do with a collapse?

In crypto, there are only so many bitcoins to go around, and if an entity is using such deposited coins to either invest in assets or loan them out without the very explicit consent of depositors, we call that theft.

In fiat, the elasticity of the available dollar amount was claimed as a selling point because it could be used to smooth out volatility, to allow this gambling or loaning while still keeping your deposits safe.

That however is clearly not the case even if the bank is solvent as Signature is claimed to have been. And just what exactly is the case is very unclear because a day after Signature was closed down on Sunday, all deposit withdrawals were available on Monday, with the obvious question being where did these deposits come from if Signature did not have them already.

The bank, apparently, asked for a loan three times on Friday from the Federal Home Loan Bank of New York, that being a cooperative of sorts of banks backed by the government.

It first asked for a $2 billion loan around noon and by 1:30 p.m. it wanted another $2.5 billion. The third time it was asked however, this regional liquidity backstop said no.

Signature went to the Federal Reserve Banks, but they too said no, just two days before they announced a new facility on generous terms whereby loan collateral is to be valued at the price bought, not current price.

Why they said no is unknown at this point, but that they did and that they could reveals the lack of clear policy on just when exactly is a bank solvent or otherwise, and on whether addressing bank runs is a matter of principle or personality.

What we have been told for years is that this whole printing was so that bank runs do not have an effect anymore, so that the Fed can be the lender of last resort, to cover all eventualities, to keep the banks running even under mass withdrawals.

Instead we learn that the risks of banking are pretty much the same as they always were, although the question is obviously why can FDIC process these deposits while Signature presumably could not.

Who is bearing the cost from either bond losses or the time difference between people wanting their fiat now and loans waiting to be repaid? And the bigger question is, considering Signature had a net income of $1 billion last year, was really a $2.5 billion cost enough to bring it down?

The loss at SVB was also about $2 billion, and somehow we are to think that this was enough to close it down. Showing the fragility of the banking business as they are all bankrupt if more than about 10% of their customers want their deposits back at the same time.

The solution to this now appears to be changing the management, even though why FDIC can cover the deposits while Signature couldn’t is an unanswered question.

Trust, is a potentially vague subjective answer. It’s the government, and so depositors can feel a bit safer, and that might have been enough to stop this bankrun.

Yet if a bankrun can still bring down a bank, and for Signature apparently for no good reason save for a collapse in confidence, at some point the question has to be answered as to just how exactly this is addressed by just putting it one turtle down.

Not that there are any holistic answers at a macro level, but this revelation that Fed refused to extend a loan when they exist precisely for that purpose reveals a still existent fragility as it basically amounts to no defense to bankruns.

In crypto our defense is simple, though with its own costs. You touch the deposits and it’s theft. In traditional banking the answer is different because they exist to make loans, even though such loans could be from profits and there could be models where depositors are charged for the account instead of stealthily charged through their deposits going to bonds.

Instead what we have is legalized appropriation, where your deposit is a loan to the bank and the bank can do with it whatever it pleases to sometime the mutual benefit, unless more than 10% of the public creditors all want their loans to be immediately repaid at the same time.

In crypto we call that 10% a hot wallet. It’s a risk to the point one can go as far as assume it is all lost, or can be at any time. So you set up a fund to amount to around that 10%, from your profits, and thus if it is indeed lost through hacks or other events, you just keep on as a cost of business.

In traditional banking however the entire business is that 10%, the capital requirements, and so it is no wonder both Signature and SVB went under almost precisely after 10% of the deposits were withdrawn.

Fed therefore said no to the loan perhaps because at that point they were bankrupt, but if indeed they were bankrupt then where are these deposits now coming from, the 90%?

Well, the answer presumably is from the bankrun no longer continuing. If instead people kept withdrawing en mass even after FDIC took over, well their whole insurance is only $120 billion and that’s for the entire trillions of dollars in the banking system.

Fed has a far bigger ‘insurance’ chest in as far as technically they can print an unlimited amount, and practically an inflation level amount, but clearly just who they print for depends on their whim.

And so welcome to the banking system: subjective, personality based, and only 10% solvent at any time, with no indication that any of it will change in a substantial manner.

Here in crypto though we can’t be too harsh because a lot of the luxuries we can afford, like 100% capitalization under a Proof of Key’s ‘regime,’ is because traditional banking handles the mass loaning service.

That allows us to both provide and experiment with alternatives, experiments that sometime go wrong like Luna, and sometime has the old banking creep in like FTX.

Yet fundamentally, and on this specific matter of 10% deposits, crypto is safer. No one fell due to FTX for example. There were bankruns on others, on pretty much the entire crypto space including Binance, Crypto.com, and others, and neither fell due to contagion or collapse of confidence because they had the deposits.

In traditional banking, all would fall if 10% withdraw or if their gambles get anywhere near losses amounting to 10% of deposits and Fed says no to a loan.

Crypto moreover doesn’t need loans in an existential manner, like banking does, anymore than gold needs loans. And although society does, it is not clear whether this unsustainable set up best serves it.

And since in this space we have the luxury to experiment, it may well be we’ll come up with better ways to do loans too, certainly in defi.

Because troubles in the banking system are nothing new, and that banking doesn’t quite work is not new either. We’re getting a reminder of just how much that is the case, but that this system needs to be improved has long been known, even if just how fragile it really is remains surprising.

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• Source: https://www.trustnodes.com/2023/03/20/the-demise-of-signature-bank-a-crypto-contrast