Former U.S. Representative. and Signature Bank Director Barney Frank has described the final days at the ill-fated New York based bank.
Signature Bank suffered a run on deposits earlier this month, forcing the government to take it into receivership, just days after California’s Silicon Valley Bank suffered a similar fate. Regulators stepped in to guarantee uninsured deposits at both banks.
Speaking during a webinar organized by the New York State Bar Association Thursday Frank explained that Signature Bank met with regulators two weeks before the bank’s demise. “There was no stress to find,” he said. “We met, the board of directors of Signature Bank, met with the regulators, two weeks before … they reaffirmed our 2 CAMEL rating, they raised no serious issues,” he said.
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The CAMELS rating system is used to measure the health of banks, with 1 as the top overall rating and 5 as the worst. The acronym represents the six components that are measured in the rating – Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk.
“It wasn’t until two weeks later, the Friday, when depositors began to withdraw, late on Friday afternoon … we began to lose deposits and people told our executives ‘I’m going to J.P. Morgan’,” Frank said. “Our executives tried to show our balance sheet, nobody has ever said we were insolvent, our loans weren’t defaulting in any significant number. They didn’t want to hear it.”
“It’s so easy now, I push a couple of buttons and I’m in a different bank,” he added. “There’s no question that the lure of the bigger banks – people didn’t withdraw their deposits and put it in their safes at home. They withdrew their deposits … and put them in banks they saw as safer, and those were predominantly the biggest.”
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New York Community Bancorp Inc. NYCB,
Frank, who served in the U.S. House of Representatives from 1981 until 2013, was one of the architects of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, implemented in the wake of the 2008 financial crisis. He joined Signature Bank’s board in 2015.
“We did say, in the bill in 2010, and they’re using it, that the Fed should step in if, for some reasons, banks became illiquid, but solvent, and, as far as Signature is concerned, my deep regret is that we were illiquid but solvent,” Frank said. “And we were getting money from the discount window, and if they had let us open on the Monday we’d be fine right now. Or if they had made the announcements on Friday that they made on Monday, we’d be fine.”
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The “discount window” is the Fed’s traditional standing liquidity facility for banks.
During the webinar Frank was asked whether he thinks that the banking sector is settling down. “Absolutely,” he responded, noting that banks are in a very different position compared to 10 or 12 years ago. “There aren’t a lot of subprime loans, or a lot of unfunded credit default swaps,” Frank said. “They’re not only better capitalized, but they are not nearly as vulnerable and overextended.”
“In 2010 we cleaned up the asset bubble,” Frank added. “My analogy, my metaphor, was that the subprime mortgages, mortgages to people who couldn’t repay them, were the bullets, derivatives were the guns,” he said. “We stopped making the bullets and we have severely regulated the guns. Fortunately, there’s no second amendment for mortgages.”