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Elizabeth Warren in letter to Signature Bank seeks answers for 'disastrous' collapse

In a new letter to the CEO of failed bank Signature Bank (SBNY), Sen. Elizabeth Warren (D-Mass.) is demanding answers from a bank she says engaged in "excessive risk-taking" while leaning on a "get-rich-quick narrative" during its foray into the crypto world.

"You owe your customers and the public an explanation for the economically disastrous outcomes you created: you worked hard to weaken the rules, promised that they 'bode[d] well' for your bank — and then destroyed it with bad decision-making and excessive risk-taking," Warren writes in the letter to Signature Bank CEO Joseph DePaolo.

"Congress and the public must learn the lessons from the failure of Signature Bank."

Warren argues in her letter the bank fought to support efforts to curtail capital requirements embedded in the Dodd-Frank Wall Street Reform law and funneled thousands of dollars in campaign donations to leaders of the effort to loosen bank regulation in Congress.

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Warren says DePaolo suggested Signature Bank, which had already amassed over $45 billion in assets by mid-2018, was too small to have significant impact on the soundness of the financial system.

"These arguments were questionable at the time they were made, and in the wake of Signature Bank's failure, they now look nefarious," Warren writes.

UNITED STATES - MARCH 7: Sen. Elizabeth Warren, D-Mass., questions Federal Reserve Chairman Jerome Powell during the Senate Banking, Housing, and Urban Affairs Committee hearing titled The Semiannual Monetary Policy Report to the Congress, in Hart Building on Tuesday, March 7, 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Sen. Elizabeth Warren, D-Mass., questions Federal Reserve Chairman Jerome Powell during the Senate Banking, Housing, and Urban Affairs Committee hearing titled The Semiannual Monetary Policy Report to the Congress, in Hart Building on Tuesday, March 7, 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

Warren's letter comes as she and other Democrats are laying blame for the failures of Signature Bank and Silicon Valley Bank on a 2018 law Congress and the Trump administration approved that loosened capital requirements and liquidity tests and subjected smaller regional banks — including Signature and Silicon Valley Bank — to less onerous oversight.

"Despite assurances made to Congress that mid-sized banks like Signature Bank would be able to manage risk independently, it has since become clear that your bank was wholly unequipped to do so, and that failure resulted in the bank being shut down and taken over by government regulators," the Senator writes.

Signature Bank was seized by regulators Sunday, becoming the third-largest bank ever to fail in the U.S.

A 'get-rich-quick narrative'

Warren also alleges the bank took on "excessive risk" to boost profits serving cryptocurrency clients.

"Signature Bank bought into its get-rich-quick narrative," Warren writes. "Signature Bank was caught short because it embraced crypto customers with insufficient safeguards."

Signature served clients in the cryptocurrency world with customers including Coinbase (COIN), stablecoin issuer Paxos, and failed crypto exchange FTX. By December 2022, crypto clients accounted for about 30% of Signature Bank’s total deposits.

Like Silvergate (SI), another crypto-friendly bank that said last week it would liquidate and wind down operations, Signature suffered from a deposit outflow in the aftermath of the collapse of crypto exchange FTX.

Deposits dropped 17% in the fourth quarter of 2022 as compared to the year-earlier period. The value of some of its securities had also dropped in value due to a rapid rise in interest rates over the last year, an issue that was at the heart of Silicon Valley Bank's failure.

Signature had $110 billion in assets as of Dec. 31, ranking 29th among U.S. banks. It had $88 billion in deposits as of that date, and nearly 90% were not insured by the FDIC.

New bill introduced

Warren has also introduced a bill along with Rep. Katie Porter (D-CA) to repeal the 2018 law, which, if enacted, would put banks with at least $50 billion in assets back under Federal Reserve oversight and make them subject to Dodd-Frank Act stress tests.

The push from Democrats to tighten capital requirements comes after Republicans on the Senate Banking Committee sent a letter to Fed Chair Jerome Powell at the beginning of March expressing concerns the Fed's reassessment of capital requirements, "may unjustly increase capital requirements and have a chilling effect on market making activities and availability of financial services."

In a statement to Yahoo Finance, a spokesman for Senator Scott stood by the initial letter.

"Like we said in our letter on risk-based capital requirements — and as Members on both sides of the aisle raised with Chair Powell this week — capital must continuously be scrutinized to ensure it is risk based and is tailored to the bank’s size, scope, and activities. What’s happening with Silicon Valley Bank highlights why we cannot have a one-size-fits-all approach."

In an op-ed in the New York Times earlier this week, Warren proposed clawing back bonuses from Signature's chief executive DePaolo as well as bonuses for other executives at Signature and Silicon Valley Bank.

Warren said Congress should give regulators authority to recover pay and bonuses, and investigate whether any executives engaged in insider trading ‌or broke other civil or criminal laws.

The Department of Justice and the SEC had reportedly already been investigating Signature Bank before its shutdown, with Bloomberg reporting the Justice Department was investigating whether the bank took enough measures to detect possible money laundering schemes orchestrated by clients.

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