Concentration: when the rail is a single point of failure

Graduate · enrolled learners

This lesson opens with Signature Bank and Signet, March 2023.

What happened

Signature Bank ran Signet, a network much like Silvergate's SEN: it let institutional clients move US dollars instantly and around the clock, and it was the other rail the crypto industry leaned on for real-time dollar settlement. In the same week of March 2023 that Silvergate announced its wind-down and Silicon Valley Bank failed, New York's Department of Financial Services took possession of Signature Bank, on 12 March 2023, to protect depositors, and appointed the FDIC as receiver. The same day the Treasury, the Federal Reserve and the FDIC invoked a systemic risk exception for Signature, so all depositors were made whole, which is why the recorded loss is zero; shareholders and certain unsecured debtholders were not protected. The effect on payments was severe: Signet's future was suddenly unclear, and a little over a week later Coinbase stopped supporting it, so its users could no longer move dollars outside traditional banking hours. Within about two weeks the industry's two instant fiat rails, the SEN (discontinued on 3 March) and Signet, were both effectively gone, and there was suddenly almost no way to settle dollars in real time, around the clock, at scale. The failures were not independent. They struck banks with the same kind of client base under the same stress at the same moment, so holding accounts at both Silvergate and Signature was not the diversification it looked like: it was two exposures to one correlated event.

The decision point

Concentration risk is the risk that comes not from any single rail but from an industry depending on a few shared rails whose failures are correlated. When everyone settles through the same two networks, those networks are load-bearing for the whole system, and if they can fail for the same reason, a run on that kind of client, a loss of regulatory support, one shock, then their failures arrive together, and the redundancy that looked like safety evaporates. Signature's Signet and Silvergate's SEN are the case: two rails, serving the same industry, that were both lost within about two weeks, leaving almost no instant fiat settlement. The trap is that two of something feels like diversification, but two rails are only diversification if they can fail independently, and rails serving the same clients under the same regulators in the same market often cannot. So the decision when relying on payment rails is to assess whether a backup is genuinely independent of the primary, different client base, different regulator, different failure trigger, rather than counting rails, because two correlated rails are one point of failure with a spare that breaks at the same time, which is exactly what the industry discovered in March 2023.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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