Silicon Valley Bank had been experiencing weak compliance and internal controls with Bank Secrecy Act/Anti-Money Laundering, Current Expected Credit Losses, liquidity risk management, interest rate risk measurement, data protection, auditing framework, and even the Volcker Rule, in many cases going back to 2016. Today, as promised, Vice Chair for Supervision of the Board of Governors of the Federal Reserve Board System Michael Barr released a report where the Federal Reserve investigated itself about supervisory issues with Silicon Valley Bank. Pundits had been waiting to see if this would be a great Federal Reserve mea culpa. In part it was.
As I posted on Twitter, the incredible dysfunction at Silicon Valley Bank is evident in the Silicon Valley Bank Review Supervisory Materials. What was a surprise to me was that there were serious problems at Silicon Valley Bank since 2016, and that not only did SVB’s
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immediate regulators the San Francisco Federal Reserve Bank and the California Department of Financial Institutions knew, but also the Federal Deposit Insurance Corporate and the Consumer Financial Protection Bureau also knew about these issues. That Silicon Valley Bank survived as long as it did is incredible.
It has been a month since Silicon Valley Bank failed, and its mismanagement continues to exacerbate uncertainty U.S. regional banks’ financial health. Soon after its demise, numerous market participants, academics, politicians, and analysts, such as I, weighed in on the lack of oversight, weak risk management, and lack of interest rate and liquidity measurements and control at SVB. Already at the end of March, we had heard from Michael Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve Board System, Martin Gruenberg Chairman of the FDIC, and Nellie Lang, Under Secretary for Domestic Finance of the U.S. Treasury. They were grilled by members of the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs.
Where Is Former SVB CEO Greg Becker?
Like in Rashomon, Akira Kurosawa’s seminal film, we have heard the story of Silicon Valley Bank’s demise from many perspectives. However, we have yet to hear from the responsible actors in this saga: Silicon Valley Bank’s former Chief Executive Officer Greg Becker and SVB’s Board of Directors. All the San Francisco Federal Reserve’s letters were sent to them.
The Senate Banking Committee and the House Financial Services Committee need to request that key SVB executives like SVB’s former and current Chief Executive Officer, Chief Financial Officer, and Chief Risk Officer testify before the public. They were the ones running the bank, not bank or securities regulators or the rest of us who have weighed in about SVB’s painful implosion.
At the very least, here are questions, they need to answer:
· Since the bank failed on your watch, do you think you really earned your salary and bonus?
· If you have to lay-off employees who were not responsible for SVB’s failure, will you pay for their unemployment benefits rather than foist this responsibility on unemployment coffers?
· Please define interest rate and liquidity risks and identify where they exist in your bank.
· Did your asset and liability management group conduct gap analysis at least every month to show how interest rate rises and decreases can impact your assets and liabilities?
· Did you calculate the level of high-quality liquid assets you had to keep you liquid if you had cash outflows, especially in periods of stress?
· Why did your Chief Risk Officer leave and why were you without one for eight months?
· CEO Becker, why did you flee to Hawaii?
SVB’s board members also should testify. The Federal Reserve makes it very clear that the role of a bank’s board is to:
- Oversee the development of, reviews, approves, and periodically monitors the firm’s strategy and risk appetite.
- Direct senior management to provide directors with information that is sufficient in scope, detail, and analysis to enable the board to make sound, well-informed decisions and consider potential risks.
- Oversee and hold senior management accountable for effectively implementing the firm’s strategy, consistent with its risk appetite, while maintaining an effective risk management framework and system of internal controls.
- Through its risk and audit committees, assess and support the stature and independence of the firm’s independent risk management and internal audit functions, and to
- Consider whether the board’s composition, governance structure, and practices support the firm’s safety and soundness and promotes compliance with laws and regulations, based on factors such as the firm’s asset size, complexity, scope of operations, risk profile, and other changes that occur over time.
The Federal Reserve’s supervisory documents also show that the internal audit at Silicon Valley Bank was extremely weak. At the very least, here are questions for SVB’s Chief Auditor,
· Did you report independently to the Board?
· How often did you audit the Asset Liability Management group at SVB?
· Have you ever found any risks, especially in interest rate and liquidity risks management?
· Were you aware of any notifications from the Federal reserve or the California Department of Financial Institutions informing you of any matters requiring immediate attention?
· Did regulators in any way notify you of any interest rate, liquidity, or other risks at SVB?
Without hearing from Becker, his executives, and SVB’s Board of Directors, we will not be able to find the underlying cause of why SVB failed. And we need to know in order to really learn lessons from this debacle.
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