GAO cites exposure to digital assets in exploring collapse of Signature Bank

Regulation

The United States Government Accountability Office, or GAO, has released its preliminary review of the failures of Silicon Valley Bank and Signature Bank — and included exposure to deposits from the cryptocurrency industry.

In a report released on May 11, the GAO said “poor governance and unsatisfactory risk-management practices” led to the collapse of Signature Bank in March. The GAO did not explicitly report that digital assets were the cause of the bank’s failure but mentioned exposure to the crypto industry alongside potential reasons.

“Signature Bank had exposure to the digital assets industry and declining liquidity in the months prior to failure,” said the report. “FDIC staff said Signature Bank management was unable to fully understand the bank’s liquidity positions in the days and hours before failure.”

Though the GAO largely did not mention the crypto-friendly Silvergate Bank, which went into voluntary liquidation in March, the report said Signature was “perceived to be similar.” Signature held roughly $12 billion in deposits connected to digital asset firms in 2022 but intended to reduce its exposure to the crypto industry.

U.S. lawmakers discussed oversight of the failed banks in a May 11 hearing, in which GAO director of financial markets and community investment Michael Clements said bank regulators had identified concerns with Silicon Valley Bank and Signature Bank before their collapse but “did not escalate supervisory actions in time.” In response to questioning from Tennessee Representative John Rose, Clements said the GAO had reviewed “large deposits from the digital asset space” in considering whether crypto had contributed to Signature’s failure.

“[Signature] was simply holding deposits and operating the accounts,” said Clements. “Following some of the turmoil in 2022, particularly FTX, some of those deposits did start to fall off.”

Different regulators have put forth their own views on the potential connection between exposure to crypto and the collapse of these banks. Adrienne Harris, superintendent of the New York Department of Financial Services, reportedly said any connection between Signature’s failure and crypto was “ludicrous,” describing the events as more of a traditional bank run.

Related: More than 186 US banks well-positioned for collapse, SVB analysis reveals

Many regulators and lawmakers continue to invoke the collapses of Signature Bank, Silicon Valley Bank, and Silvergate Bank in discussions around crypto. Following the bank failures, crypto firms including BlockFi and Gemini released statements claiming to have had sufficient funds to offset exposure or no exposure at all.

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