Written by James Rogers, MarketWatch

Featuring Partner Jay L. Hack, Gallet Dreyer & Berkey, LLP

Signature Bank provided critical services to law firms. Now, they’re weighing their next move. Lawyers are keen to get information on what the collapse of Signature Bank means for them and their clients.

The failures of Silicon Valley Bank and Signature Bank have sent shock waves across the U.S., with the tremors felt acutely in key industries.

While Silicon Valley Bank was renowned for its close links to the tech-startup communities of Northern California and beyond, Signature Bank of New York had earned a reputation as a crucial provider of services to law firms.

Signature Bank’s demise has raised the legal profession’s awareness of risk issues, according to Joseph Silvia, a partner at international full-service law firm Dickinson Wright. “One of the immediate reactions was, from a general perspective, this is happening to a bank that is a significant provider of services to law firms [and] as law firms, maybe we need to better appreciate how our bank accounts function,” he told MarketWatch.

“The conversation from the legal industry’s perspective is really focused on understanding what law firms should be thinking about in terms of engaging with a provider of banking services,” the Chicago-based lawyer added.  

Specifically, Silvia highlighted the importance of risk management and capital liquidity risk. “I think that, overall, there’s going to be more due diligence around these areas,” he said.

Earlier this month, Signature Bank of New York suffered the same fate as Silicon Valley Bank when a run on deposits forced the government to take the bank into receivership. As with Silicon Valley Bank, regulators stepped in to guarantee uninsured deposits at Signature Bank. New York Community Bancorp NYCB, -0.39% quickly purchased $38.4 billion in deposits, $12.9 billion in loans and 40 branches of Signature Bridge Bank from the Federal Deposit Insurance Corp. New York Community Bancorp’s stock has risen since the purchase.

But as the aftershocks from Signature Bank’s demise continue to reverberate, some law firms may now look to work with larger banking entities, according to Silvia. “I think that there will be some law firms that just go with some of the large banks. … They have a perceived increased level of security with these deposits,” he told MarketWatch. “There may be a trade-off that [some law firms] will accept with regard to some of the personalized services that they were receiving at Signature Bank.”

The New York-based Signature Bank, a full-service commercial bank, had forged strong links with the legal sector, regularly winning plaudits for its offerings in that space. Real-estate lawyers in particular relied on Signature Bank for escrow services. In September 2022, Signature Bank was ranked number 1 in both the private-bank and business-escrow categories in the New York Law Journal’s 13th annual “Best of” survey.

Signature Bank was also ranked number 2 in the business-bank category last year, marking the 13th consecutive year that it had ranked in a top-three position in one or more of the survey’s categories.

Understandably, lawyers are keen to get information on what the collapse of Signature Bank and Silicon Valley Bank means for them and their clients. While large law firms typically have plenty of in-house expertise to call on, Silvia says that many smaller firms are not so fortunate. “It forces a lot of additional education on the part of law firms, particularly the smaller law firms that don’t have the staff or expertise, specifically in bank regulatory matters,” said Silvia. This could involve, for example, speaking to bankers to understand how deposit insurance works and how the banking system works to ensure that client funds are protected, or harnessing bar association resources on the topic.

Almost 800 people attended a webinar on the bank failures organized by the New York State Bar Association last week, and another 150 were expected to attend a webinar on the topic Thursday.

“We make it our business to advise lawyers what to do when the unexpected happens — and certainly the biggest bank failures since the 2008 financial crisis surprised most of us,” said Sherry Levin Wallach, president of the bar association, in a statement. “Providing timely information is one of the ways we make it easier for our members to practice law.”

Speaking at last week’s webinar, Jeffrey Marsico, president of bank consulting firm the Kafafian Group, discussed the government’s efforts to instill confidence after the failure of the two banks.

“I guess the message is that we have to inject confidence back in the system,” he said, noting that, in addition to the federally insured sum of $250,000 per account holder, the government also stepped in to insure deposits over that amount at the two failed banks. “Since they committed to paying out all the deposits at Signature and at SVB, they are de facto insuring those deposits over $250,000,” he added.

Speaking during Thursday’s webinar, Jay Hack, a partner at New York-based law firm Gallet Dreyer & Berkey, emphasized the importance of calm in the wake of Signature Bank’s failure. “The worst thing can be panic. Don’t panic,” he said. “Your clients shouldn’t panic, you shouldn’t panic — but everybody should know where your escrow money is held.”