Signature Shutdown Blows Huge Hole in NYC's CRE Lending

Signature Bank—the NYC-based regional bank that was shut down and taken over by federal regulators on Sunday—has been one of the top commercial real estate lenders in the city for the past decade.

The collapse of the bank, headquartered on Fifth Avenue, has blown a big hole in the already challenged financial ecosystem of CRE in NYC, experts say.

No other bank has issued a higher number of commercial real estate mortgages backed by New York City buildings since the beginning of 2020, according to an analysis by Pincus; only Wells Fargo and JPMorgan Chase have lent more money than Signature overall to CRE developers and building owners in NYC during the same period.

A portfolio of real estate loans encompasses more than a third of Signature’s $110B in assets, about $36B—almost all of it backed by NYC buildings—according to year-end 2022 data from the Federal Deposit Insurance Corp. FDIC data also shows the bank’s CRE loan portfolio grew more than fourfold over the past decade.

“The closure of Signature Bank will remove a significant source of liquidity in the New York commercial real estate market. Other lenders may increase their activity to fill the gap left by Signature Bank, but it seems unlikely in the current environment,” Trepp said, in a new report that estimates Signature’s share of NYC’s overall commercial real estate lending at 12%.

Signature’s collapse also eliminates the leading lender by far in NYC for apartments serving low-to-middle income households at a moment of maximum demand for affordable housing. Going back to 2009, Signature consistently has been a perennial leading lender to the multifamily sector in the city.

According to a report in yesterday’s Wall Street Journal, a run on Signature by NYC landlords and real-estate investors played a major role in the bank’s collapse. Many of the developers, wealthy real estate families and property funds who borrowed from Signature also keep sizeable deposits at the bank, WSJ reported.

Rent payments for offices and apartment buildings throughout NYC are channeled through Signature accounts and vast sums wired from property buyers to sellers move through escrow accounts at the bank, which is the “bank of choice” for numerous real estate lawyers and accountants, the report said.

These CRE bank customers were spooked by the collapse of Silicon Valley Bank (SVB)—a leading repository in the US for venture capital seed money for startups—and by Signature’s exposure to cryptocurrency firms, which the New York bank aggressively has been courting for the past two years.

Along with SVB and several other regional banks, Signature successfully lobbied Congress in 2018 to water down the Dodd-Frank Act banking reforms enacted after the global financial crisis in 2008.

A law enacted with bipartisan support in 2018 exempted regional banks with less than $250B in assets from the annual stress tests required by Dodd-Frank, tests designed to make sure banks aren’t loading up on high-risk speculative instruments—like bundles of sub-prime mortgages, startups and cryptocurrency—without the liquidity to withstand a run by depositors.

Freed from the strict oversight of Dodd-Frank, SVB and Signature became so large that the federal government took the unprecedented step this week of extending guaranteed FDIC coverage of deposits—normally limited to $250K per bank account—to all deposits at the two banks, including millions of dollars in the accounts at SVB of well-heeled VC funds and cryptocurrency firms doing business with Signature.

After regulators closed Signature Bank, the FDIC created a new entity called Signature Bridge Bank. Federal regulators and the Treasury Department said it would guarantee all Signature deposits.

The regional banks weren’t alone in loosening the strict liquidity rules of Dodd-Frank. In a scathing Op-Ed piece in the New York Times this week, the chair of the Senate Banking Committee, Sen. Elizabeth Warren, said they had a lot of help from Fed Chair Jerome Powell, who supported the 2018 amendments to Dodd-Frank.

Signature Bank also was assisted by another highly influential resource: they had the world’s leading expert on Dodd-Frank sitting on their board of directors, leading its lobbying campaign to water down the 2009 bank reforms and cheering on its marketing campaign to draw new business from crypto firms.

That would be Signature Bank board member Barney Frank, the retired US Representative from Massachusetts, co-author of the Dodd-Frank Act. Since this is being written on the Ides of March, we’ll say it:

Et tu, Barney?