The arrival of a new government has ushered in a phase of uncertainty surrounding the state of banking regulation and the regulator itself..
Beyond the usual means of rule-making and enforcement, the courtroom movement also offers additional ways to shape corporate policy and internal operations, and litigation could be beneficial to the industry as a whole. There is.
One of those suits, Submitted last week by Federal Deposit Insurance Corporation against 17 former executives with ties to (FDIC). silicon valley bankpoints out several important issues that will come under scrutiny from authorities.
The individuals named in the lawsuit range from SVB's former CEO and board members to its former chief risk officer and former chief financial officer.
At the heart of the lawsuit, the FDIC's claims center on “gross mismanagement” of risks, particularly interest rate and liquidity risks. As a result, SVB was acquired and shut down by the California Financial Regulatory Authority in March 2023, as customer withdrawals and plummeting stock prices plagued the bank due to investor concerns about liquidity. at that timePYMNTS observed that social media, the digital-first nature of banking models, and fintech customers have converged to bring bank runs into the 21st century.
Lawsuit was foreseen
Last week's lawsuit was foreshadowed, As reported here last monthwhen The FDIC's board of directors reportedly voted unanimously to approve possible legal action against former SVB executives.
Then, as now, the FDIC alleges that former bank directors and officers mismanaged held-to-maturity portfolios, including buying long-term securities when interest rates were rising. The result has been an over-concentration of these assets. The FDIC also accused executives of improperly managing the bank's available-for-sale securities portfolio, including removing interest rate hedges.
The FDIC took a closer look at the lawsuit filed in the U.S. District Court for the Northern District of California, noting that SVB has grown far faster than the industry as a whole, with the industry growing 24% over the period measured starting in 2016. did. From the end of 2019 to the end of 2022.
Per lawsuit:
“By the end of 2022, venture capital-backed companies in these sectors will account for more than half of SVB deposits, with growth in SVB deposits and deposits directly tied to venture capital deal activity and liquidity events related to those deals. FDIC stated. observed. “The majority of SVB’s deposits were also uninsured because they exceeded the FDIC deposit insurance threshold of $250,000.”As of the end of 2022, SVBFG and SVB’s regulatory filings state that SVB This reflected that approximately 94% of deposits were uninsured.
Growth outpaced risk management and oversight
These deposits ultimately are “inherently less stable” due to “the newness of these deposits, their concentration in certain industry sectors with highly volatile liquidity profiles, their uninsured status, and other factors. “The characteristics of these deposits have made them less 'sticky' and have left the SVB, making them particularly vulnerable to the risk of withdrawal in the event of a rise in interest rates or a loss of market confidence in the SVB,” the complaint states. are.
Within the aforementioned period, the Federal Reserve Board and state regulators identified concerns about deposit concentration, noting that risk management was being “outpaced” by asset growth. It cited deficiencies in liquidity risk management and stress testing, including a “lack of effective board oversight” and a lack of a “formal framework” to help manage that risk.
“Instead of taking remedial action to correct this high-risk concentration, address violations of policies and risk metrics, and reduce SVB's interest rate risk, defendant executives “We have changed the assumptions underlying one of SVB's risks.” An unwarranted model in which SVB tries to make it seem like it's not violating its own policies.
