A Blog by Jonathan Low


Mar 13, 2023

Why Silicon Valley Bank's Collapse Has Its Roots In Failed Leadership

SVB's collapse represents leadership failure at numerous levels: senior executives pressed for relaxation of banking standards but when the tech market dropped last year, they did not address potential threats to the bank. The board failed in its oversight responsibilities to raise questions about what the bank was doing to manage the new risk. 

And when the CEO and CFO started selling stock in the face of the impending crisis - a serious moral, financial and legal hazard - neither they nor the board evidently thought about their duties to depositors, investors and lenders. But this is not 2008. There can - and almost certainly will - be serious legal repercussions for those leaders who so egregiously ignored their leadership responsibilities. JL  

Sheryl Estrada reports in Fortune:

The actions of SVB CEO Greg Becker added fuel to the fire. “He sold significant personal stock holdings in the last week. This (added) to the speed at which the situation escalated." (And) CFO Dan Beck sold 2,000 shares of SVIB. SVB is a major lender for the tech and venture capital sectors but the bank didn’t have a chief risk officer for eight months. SVB should have diversified its lending and deposit customers. The board-appointed risk management committee should have done adequate analysis to examine deposit withdrawal risk. The bank exposed its asset side of the balance sheet but also its liability side. "The CFO and the board failed to adequately protect shareholder value.”

“I think this is a colossal failure in asset-liability risk management,” Mark T. Williams, a former bank examiner for the Federal Reserve, tells me.

Williams is referring to actions that led to Silicon Valley Bank’s seizure by federal regulators on Friday following a bank run. It’s being deemed the largest institutional failure since the 2008 financial crisis. SVB is a major lender for the tech and venture capital sectors. But the bank didn’t have a chief risk officer for about eight months, Fortune reported.

SVB’s parent company, SVB Financial Group, disclosed on March 8 its big bet—it sold $21 billion of bonds, resulting in an after-tax loss of $1.8 billion for the quarter, Fortune reported. Many of those bonds were yielding an average 1.79%, far below the current 10-year Treasury yield of around 3.9%. SVB also disclosed it was conducting a stock sale worth $2.25 billion in an attempt to shore up its finances. But as my colleagues Anne Sraders, Jessica Matthews, and Kylie Robison write, this news caused panic among investors. On Thursday, investors and depositors tried to pull $42 billion from SVB.

The actions of the CEO and CFO

“Customers losing trust was obviously a big trigger in SVB’s collapse,” says Thomas Smale, CEO of FE International, a mid-market tech-focused M&A company. Concerned clients were already calling rival banks looking to move large balances in excess of FDIC insurance caps, Smale says. In addition, there were some venture-capital investors who advised startups to pull their money out of the bank to avoid losses should the bank fail, he says. 

And the actions of SVB Financial Group CEO Greg Becker added fuel to the fire. “He sold significant personal stock holdings in the last week ($3.6M on Feb. 27),” Smale says. “So, I do not think this is good optics for investors and likely has not helped the speed at which the situation has publicly escalated. Actions often speak louder than words in these situations.”

Meanwhile, also prior to the bank’s collapse, on March 1, SVB Financial Group CFO Dan Beck reported the sale of 2,000 shares of SVIB at an average of $287.59, totaling over $575,000. Beck joined the bank in June 2017 with a starting annual base salary of $525,000. He is responsible for all finance, treasury, and accounting functions and also serves on SVB’s executive committee. Before SVB, Beck was CFO and treasurer at Bancwest Corp. He also held financial positions at Wells Fargo and Freddie Mac.

“To prevent a crisis of confidence, SVB’s CEO and CFO should have relied more on an old-fashioned banking approach of diversification of its lending and deposit customers,” says Williams, a master lecturer in the finance department at Boston University’s Questrom School of Business. “Venture capital is a highly risky business. So not only did the bank expose its asset side of the balance sheet but also its liability side.” 

“The CFO and, I would argue, the board failed to adequately protect shareholder value,” Williams says. “The board-appointed risk management committee, which works closely with the CFO, should have done adequate scenario analysis to examine the deposit withdrawal risk. That, in fact, was the bank’s downfall.”

Going forward

The U.S. Treasury, the Federal Reserve, and the FDIC, issued a joint statement on Sunday that SVB depositors will be able to access their money, and no losses associated with the resolution of SVB will be borne by the taxpayer. A top priority of the Treasury and the FDIC is to find a buyer for the bank. HSBC announced today a deal to buy the U.K. subsidiary of SVB.

In the U.S., SVB banked nearly half of 2022 venture-backed tech and life science companies. And in 2022, 44% of U.S.-venture-backed technology and health care IPOs, according to the company. “Unlike typical retail bank customers, 95% of SVB’s depositors were not FDIC-insured,” Williams says.

Will SVB’s downfall impact public companies? “In the near-term, there is minimal exposure from a public company perspective around this SVB implosion, and outside of Roku and a handful of others in the tech world with money at the bank, we see negligible impact on the cash balances of public tech players,” Wedbush analysts wrote in a note on Sunday. “However, while we have heard from public CFOs since Friday night across the board which should calm down initial tech investor fears, the bigger and more troubling story is how this will change the start-up and VC community going forward.”


Anonymous said...

I am not a business person or have a lot of expertise in this area. However, from my observation, it is true that the managers did not care too much about the customer's interests. Hopefully in the future the managers of banks will pay more attention to this. Thanks for your share, elastic man.

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