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The ghosts of Dick Fuld’s glare appeared on the furrowed brows of financiers Tuesday during a quarrelsome Senate hearing on what sparked the ongoing regional banking crisis of 2023.
Executive leadership at Silicon Valley Bank (SIVBQ) and Signature Bank (SBNY) avoided taking accountability for the failure of their banks throughout a combative Senate hearing, repeatedly sidestepping accusations of failed risk management policies and insisting that federal monetary and regulatory policies fed into a crisis that eventually consumed their banking houses.
This unapologetic — if not surprising— self-appraisal of the third and fourth largest bank failures in U.S. history came during a Capitol Hill hearing held by the Senate Committee on Banking, Housing and Urban Affairs. Former Signature Bank Chairman Scott Shay even insisted that his bank was prepared to survive the run it experienced had Federal and New York State regulators not pulled the plug on Signature’s $110 billion operation on Sunday, March 12.
“We had a plan to continue to be able to open on Monday morning and in the future, indefinitely,” Shay testified. “We were at all times solvent and well-capitalized, and even with the sale of our available-for-sale securities, we still would have remained well capitalized.”
When pressed whether Signature’s multi-billion-dollar exposure to the imploding cryptocurrency industry factored into the decision of regulators to characterize the bank as a “systemic risk” to the financial system that required immediate takeover, Shay replied: “I don’t know what the reasons are – I can’t speak for the regulators and their decision making process.”
Greg Becker, former CEO of Silicon Valley Bank (SVB), which failed on March 10 while holding roughly $210 billion in assets, defended his management and blamed the federal government for flooding the financial system with uncharacteristic levels of liquidity prior to the bank’s sudden collapse.
“Ultimately I believe SVB’s failure was brought about by a series of unprecedented events …. with near zero-percent interest rates and the largest government sponsored economic stimulus in history, more than $5 trillion in new deposits flooded into commercial banks,” Becker said. “By the end of 2020, SVB had grown 63 percent over the prior year, and in 2021, SVB’s assets grew another 83 percent to $212 billion.”
“Importantly, throughout 2020 and late 2021, the messaging from the Federal Reserve was that interest rates would remain low and that inflation, which was starting to bubble up, would only be transitory,” he added.
SVB collapsed largely due to the bank’s decision to invest more than 55 percent of its loan portfolio in long-term, fixed-income Treasury securities that – while low-risk – were vulnerable to interest rate hikes. After the Federal Reserve raised interest rates to nearly 5 percent over 12 months, SVB’s bond portfolio lost considerable value, forcing the bank to sell it at a $2 billion loss in early-March. With nearly 90 percent of its depositors uninsured beyond the Federal Deposit Insurance Corporation’s (FDIC) $250,000 threshold, SVB became vulnerable to a bank run of unprecedented proportions once news spread that it was experiencing liquidity issues.
Becker blamed the media and the March 8 failure of Silvergate Bank, another California-based lender to technology firms and venture capital start ups, for poisoning the well that SVB drank from, leading to a death-by-association feeding frenzy.
“Despite stark differences in our business models, news reports and investors wrongly lumped SVB and Silvergate together,” Becker said. “Rumors and misconceptions quickly spread online, culminating on March 9 with the first ever social media bank run, leading to more than $42 billion in deposits being withdrawn from SVB in 10 hours, or $1 million every second.”
Senators challenged the assertions by both Becker and Shay that their banks were merely victims to overzealous regulators and the sudden flooding of federal liquidity that produced inevitable balance sheet growth.
Senator Mike Rounds of South Dakota noted that a recent Federal Reserve supervisory report found that senior leadership at SVB failed to manage basic interest rate and liquidity risk, and that the bank’s executive leadership altered its own risk-management models to remove hedges for interest rate increases and created compensation packages built around short-term earnings and equity returns, without any risk metrics attached to them.
Senator Sherrod Brown of Ohio, Chairman of the Banking Committee, noted that when SVB failed it was without a chief compliance officer for more than a year and that it had more than 31 unresolved supervisory findings identified by federal regulators requiring immediate attention.
“It seems like big losses and a struggling stock price motivated management to jump start profits and boost the stock price and in doing so you just didn’t seem to care about increasingly obvious risk,” Brown said. “Mr. Becker, your version of events blames SVB’s failure on too many interest rate hikes … and the regulators for being too slow to highlight long standing problems. It sounds a lot like the dog-ate-my homework.”
Brown chastised Signature’s Shay for carrying a concentrated depositor base overly weighted toward wealthy clients that made it susceptible to a sudden bank run. He pointed out that an FDIC report from April found that Signature failed to prioritize good government practices and often ignored FDIC advisory recommendations prior to its rapid collapse, especially with regards to diversifying its depositor base.
“In the end you bet on the hope that customer’s really, really valued that relationship, ignoring common sense risk management,” Brown said. “The bank ended up with an extraordinary level of client concentration, the numbers, frankly, are hard to believe: 60 clients held 40 percent of total deposits, four depositors accounted for 14 percent of total deposits.”
Finally, Senator John N. Kennedy of Louisiana pulled no punches when lambasting the bank executives, blaming them for prioritizing short-term profits over long-term risk management. He attacked SVB’s “stupidity” in one testy exchange with Becker:
“Mr. Becker, you made a really stupid bet that went bad, didn’t ya?” Kennedy said. “And the taxpayers of America had to pick up the tab for your stupidity, didn’t they?”
“Senator, there were a series of events, unprecedented events, that occurred, that led us to where we are today,” Becker said.
“No, this wasn’t unprecedented, this was bone-deep, down-to-the-marrow stupid,” Kennedy said. “You put all your eggs in one basket and unless you lived on the international Space Station you could see that interest rates were rising and that you weren’t hedged.”
Brian Pascus can be reached at bpascus@commercialobserver.com
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