Thread by @Frances_Coppola

The NY DFS seized #SignatureBank under Section 606 of the New York Banking Law. Here's the list of reasons justifying seizure. They are pretty wide-ranging. codes.findlaw.com/ny/banking-law….

So let's discuss which of these reasons the NY DFS might believe apply to #SignatureBank, shall we? It could be more than one.

I think b), c) and d).

c) and d) would surely include the prospect of a devastating bank run commencing when the bank re-opened on Monday, which was imho a racing certainty.

But I think b) justified placing it into receivership. SBNY's crypto-related business already "raised significant safety and soundness concerns" under the Fed/FDIC/OCC's statement on crypto-asset risks to banks. fdic.gov/news/press-rel…

The FED/FDIC/OCC's subsequent statement on liquidity risks includes a warning about inflows. Silvergate's collapse triggered enormous deposit inflows to #SignatureBank which it made no attempt to manage or stem - indeed if anything it encouraged them. fdic.gov/news/financial…

Why are sudden large deposit inflows a problem? Firstly, because they overwhelm the bank's internal controls. A flood of large institutional deposit inflows is a regulatory red flag. They imply the bank's internal controls are either too lax or have been suspended.

Secondly, because hot money inflows are volatile. They can leave as quickly as they arrived. A sudden inflow of unstable corporate deposits significantly reduces the bank's stable funding, rendering it vulnerable to liquidity crisis.

Thirdly, because deposits are liabilities. Of course, they come with cash attached, which is an asset. But the effect of hot deposit inflows is exactly the same as that of excessive lending. It rapidly increases the size of the balance sheet and decreases regulatory capital.

So it's also possible that NY DFS though the deposit inflows to #SignatureBank would decrease its capital sufficiently to invoke e).

Any banking experts like to comment? @jeuasommenulle @dsquareddigest