The failure of Signature Bank two years ago led the New York Department of Financial Services to implement new escalation protocols when issues are identified at banks, Superintendent Adrienne Harris said Tuesday.
Harris, during a conversation at the Brookings Institution in Washington, said a number of reforms came from the New York City-based bank’s March 2023 failure — some of which were already in the works, and others that the agency’s staff hadn’t given as much thought to.
Signature’s collapse was the fourth-largest bank failure in history, occurring two days after Silicon Valley Bank shuttered. First Republic Bank followed in May of that year. The regional bank failures highlighted a need for better processes by which bank examiners elevate weaknesses, before banks find themselves in crisis, Harris said.
“What we saw with all the banks that failed that weekend, including Signature, is they all had persistent threes, at least, in critical areas like liquidity risk management,” she said.
Harris was referring to banks’ CAMELS ratings, which stands for capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. The ordinal scale — 1 being the best to 5 being the worst — is used by regulators to evaluate a bank’s overall condition.
Amid a years-long lookback of all of the banks under the regulator’s purview, Harris said her staff assessed “who’s been a C student cycle after cycle after cycle, in the same area? Because if you had a kid who was getting Cs in math semester after semester, you would have some sort of intervention.”
For banks habitually receiving substandard ratings, NYDFS needed “a process by which the examination staff will escalate that issue to executive management, and then a determination has to be made: Do we need an interim exam? Do we need a [memorandum of understanding]? Do we need a consent order?” she said.
“If those issues aren’t bubbling up, we can’t take proper action,” Harris added.
For banks scoring a 3 on their examinations, in any one area, exam cycle after exam cycle, the regulator’s new escalation protocol draws attention to that and determines which proactive efforts may be beneficial.
NYDFS also reviewed its examination process, evaluating the number of people involved and how long it took, and “shrunk that down quite a bit, so we can provide more real-time guidance to our banks,” Harris said.
Something that Harris said surprised her as Signature was in free-fall: The lender couldn’t produce accurate data in a timely way. As NYDFS worked with the bank to assess how much collateral Signature could pledge to the Federal Reserve for emergency liquidity, the bank over a 12-hour period, went from saying $6 billion to $500 million, Harris said.
“Certainly, in a crisis situation, you should be able to quickly produce accurate data that doesn’t swing $5.5 billion in 12 hours,” she said. “Seems sort of like table stakes.”
That inspired NYDFS to do an operational stress testing exercise, similar to what occurred that weekend, to see if a diverse array of lenders could produce specific data, she said.
“Everybody’s got plans that sit on the shelf, but unless you test them, you don’t know that they’re going to work in a crisis situation,” she said.
During her time at the helm of NYDFS, Harris has also spearheaded an effort to bolster staffing and retention. The regulator has hired or promoted about 1,000 people during her more than three years there, including hiring nearly 200 new examiners, she said.
Brookings Senior Fellow Aaron Klein, noting current hiring freezes or cuts at federal banking agencies, remarked, “I think you’ll be seeing a lot of people come from Washington.”
“We welcome you,” Harris said.
