To Know Why Silicon Valley Bank Failed, Congress Should Ask Former CEO Greg Becker

Silicon Valley Bank had serious problems with compliance and internal controls since 2016, according to a new Federal Reserve report, and not only did the bank’s immediate regulators know, the but the Federal Deposit Insurance Corporate and the Consumer Financial Protection Bureau did too.

The report by the vice chair for supervision of the Fed’s board of governors, Michael Barr, was to investigate the Fed’s own oversight of Silicon Valley Bank. Observers had been waiting to see if the report, released Friday, would be the Fed’s mea culpa. In part, it was. It was far more interesting for me to look through the Silicon Valley Bank Review Supervisory Materials. This is where you really see the dysfunction at Silicon Valley Bank (SVB).

As I posted on Twitter, SVB had been experiencing not only very weak interest rate risk measurement and liquidity risk management since 2021, the documents brought to light other problems the public was not aware of. SVB had been cited for compliance and internal controls with Bank Secrecy Act/Anti-Money Laundering, Current Expected Credit Losses measurements, data protection, internal auditing framework, and even the Volcker Rule which attempts to prohibit banks from speculating in securities and derivatives. Some of these problems started in 2016 and were still not resolved the day that the bank failed this March.

SVB’s Failure Has Wreaked Havoc In The Banking Sector

It has been almost two months since Silicon Valley Bank failed, and its mismanagement continues to exacerbate uncertainty about U.S. regional banks’ financial health. Soon after SVB’s demise, numerous market participants, academics, politicians, and analysts, including me, 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 Silicon Valley Bank 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: the bank’s former chief executive officer Greg Becker and SVB’s board of directors who received the San Francisco Federal Reserve’s letters.

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 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. Every time a bank fails, it is ordinary Americans that get hurt. That has to stop!

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