Barney Frank, former chair of the US House Financial Services Committee and a director of Signature Bank from 2015, sheds light on the regulators’ role in the liquidity crisis, and the report by the Federal Deposit Insurance Corporation blaming the failure of Signature on the lack of understanding of risks. 

Frank was the co-author of the Dodd-Frank financial reform act of 2010, promulgated to resolve the issues arising from the 2008 crisis.

Both the bank and regulators were unaware of the risks involved, Frank said during the session co-hosted by The Asian Banker’s international resource director Gordian Gaeta and Foo Boon Ping, president and managing editor. 

He explained: “We had always had a 2 (Camel rating). Very few banks get a 1. And then on February 15th, they reaffirmed the 2 rating. So less than a month before we were shut down, the two regulators continued giving us the second-highest rating with, as they said, no indication that there was a panic.

“What happened was on a Friday afternoon, because Silicon Valley Bank failed, we were hit with an extraordinary rush of deposit withdrawals. And on Sunday they decided to shut us down, quite prematurely, in my judgment. At no point did they ever argue that we were insolvent or that we did not have sufficient capital and assets in general.”

There are notable distinctions in the challenges and failures between Silicon Valley Bank (SVB) and Signature Bank. SVB failed due to issues beyond its cryptocurrency affiliation that affected its solvency. 

Frank explained that Signature, on the other hand, experienced a liquidity crisis and not solvency issues or toxic assets. The panic induced by Signature’s crypto affiliation contributed to deposit withdrawals, ultimately leading to its shutdown. 

He observed: “What happened in America was a panic induced by the notion that there was something incurably toxic about the affiliation with crypto.”

He highlighted the need to differentiate between solvency and liquidity. He advocated for the regulation of cryptocurrencies to dispel unwarranted panic and mitigate risks. Proper regulation can ensure investor protection and prevent unfounded fears from destabilising the banking system.

He also called for an increase in deposit insurance limits for businesses as a means to manage risks. The current limit set at $250,000 may be sufficient for individual depositors but poses a challenge for businesses with large payroll and vendor payment commitments.

Frank also spoke to the importance of proactive measures such as establishing a Federal Reserve facility to provide anticipatory liquidity support to solvent institutions. This approach would enable timely action to prevent crises and maintain the smooth functioning of the economy.