Review of FDIC handling of failed Signature Bank cites missed opportunities, inconsistency in exams, supervision

Missed opportunities to downgrade a troubled bank’s exam ratings and inconsistency in performing timely supervisory activities by the federal insurer of bank deposits contributed to a “material loss” to the insurance fund from the failure of a regional New York bank last spring, according to a report issued Tuesday.

The material loss review of Signature Bank of New York – which failed in March – was released by the office of inspector general (OIG) for the Federal Deposit Insurance Corp. (FDIC). The review was performed by the firm of Cotton & Company Assurance and Advisory, LLC, for the FDIC’s OIG.

The review was mandated by the OIG to do two things: determine why the bank’s problems resulted in a material loss to the FDIC’s Deposit Insurance Fund (DIF) and; evaluate the FDIC’s supervision of the bank, including the agency’s implementation of Prompt Corrective Action (PCA) requirements and make recommendations for preventing any such loss in the future.

According to the report issued by the OIG, the review found:

  • Signature Bank failed due to insufficient liquidity and contingency funding mechanisms and inadequate risk management practices by bank management;
  • The FDIC missed opportunities to downgrade Signature Bank’s management component rating under the agency’s exam program, and further escalate supervisory concerns;
  • The agency did not consistently perform supervisory activities in a timely manner and was repeatedly delayed in issuing supervisory products;
  • While the FDIC appropriately downgraded Signature Bank’s liquidity component rating in the exam program, changing market conditions warranted the FDIC’s review and potential revision to supervisory guidance; and
  • The FDIC found that Signature Bank was well capitalized for PCA purposes.

The OIG said the report contains several recommendations intended to improve the agency’s  supervision processes and its ability to “apply effective forward-looking supervision in a changing banking environment.”

The OIG said those recommendations to FDIC include that the agency:

  • Provide training to examination staff on the timely escalation of supervisory concerns;
  • Evaluate and improve existing guidance;
  • Reassess the agency’s examination staffing strategy;
  • Implement and monitor metrics for the FDIC’s supervision of large banks;
  • Reevaluate its guidance with respect to deposit stability and liquidity stress testing.

The report said the agency concurred with all of these recommendations and plans to complete corrective actions by March 31, 2024.

Material Loss Review of Signature Bank of New York