Days after FTX crashed, taking billions in customer investments down with it, New York’s Signature Bank tried to calm concerns about its exposure, claiming just 0.1 percent of deposits were linked to the bankrupt cryptocurrency exchange.
But a closer look at Signature’s deposit makeup shows the major multifamily lender’s vulnerability to crypto goes well beyond FTX. Should the exchange’s meltdown trigger a contagion across digital currencies, Signature could see deposits drop and be forced to rein in the lending that many apartment building owners rely on.
Nearly four years ago, Signature became the first bank to launch a digital payment platform, called Signet. The technology allowed customers to instantly move funds by converting U.S. dollars to the bank’s digitized currency.
Crypto customers were quickly drawn to the bank. Joseph Seibert, head of its digital asset banking division, told the Financial Brand in 2020 that the platform brought a wave of deposit growth.
“What this does is allow us to pivot into a world where we see a lot of non-interest-bearing deposits,” he said, referring to deposits that typically stem from crypto clients and are essentially free money that banks can lend out for pure profit.
In the third quarter of 2020, around 30 percent of the bank’s $54.34 billion in total deposits — $16.2 billion — were non-interest-bearing, Coindesk reported.
By the fourth quarter of 2021, that share had jumped to nearly 42 percent of its $106 billion in deposits. That October, as Bitcoin was approaching its $64,400 peak, FTX linked up with the bank, integrating Signet’s instant deposit capabilities.
The next month, the crypto winter began. The value of one Bitcoin plunged by tens of thousands of dollars — it’s under $16,000 now — and customers, spooked by the sell-off, yanked deposits from Signet.
Through the first quarter of 2022, the bank had lost 19 percent of its digital-asset deposits, according to a note by Stephens analyst Matthew Breese reported by S&P Global.
Last quarter, deposits from digital asset customers were down to $23.5 billion, about 23 percent of the bank’s total holdings, according to Breese.
That leaves Signature in a tricky spot. Although the bank has already suffered a big hit to digital deposits, it has more to lose.
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As Breeze told S&P Global, Signature faces deposit risk from two fronts: direct exposure to FTX and declining overall assets across the cryptocurrency ecosystem.
While FTX is likely to affect only a sliver of the bank’s holdings, the ripple effect of the meltdown could drive more digital customers to yank funds. That would compel Signature to reel back its lending, which is focused on commercial real estate.
Citing declining digital deposits in the second quarter of 2022, CEO Joseph DePaolo said the firm would need to make fewer real estate loans to maintain a healthy loan-to-deposit ratio.
Banks must keep enough deposits on hand to finance loans. A higher ratio implies less cash on hand.
Before the FTX meltdown, Signature had already reported a ratio in the third quarter of 72 percent, up from 61 percent a year before.
Though DePaolo assured analysts during last month’s earnings call that the bank hadn’t suffered “any issues with liquidity at all,” he did admit that when it comes to the crypto pullback, “I don’t know what the bottom is.”
Crypto markets have continued to slide since FTX’s flameout. Bitcoin has fallen by 22 percent since the exchange showed the first signs of insolvency early this month.
Last week, Bloomberg reported that the fall of one of the most well-known firms sent an industry-wide signal that no one is safe.
Crypto exchange Coinbase, as of Monday, had lost a quarter of its value over the past four trading sessions, CNBC reported, as investors pulled back amid contagion fears.
Just last month, Coinbase integrated with Signet, in a partnership akin to the one between Signet and FTX.
Amid that potential for deeper industry-wide losses, Signature’s shares have plunged.
The bank had rallied briefly after announcing minimal exposure to FTX, with its stock price rising 6.5 percent to $147 last Tuesday.
But Signature has since given up those gains and more, falling over 11 percent. Year to date, the bank’s share price has plummeted nearly 60 percent.
On Twitter, the short speculators have already begun to swarm.
“Anyone look into $SBNY?” one user Tweeted last week, citing the bank’s ticker symbol. “Doing some digging tonight to see if this [is] a short prospect.”
“The problem is not just direct exposure but indirect. If there is a contagion, why would you keep your money in either of the banks?” replied another, referring to Signature and crypto-exposed Silvergate Capital.