Former executive at Silicon Valley Bank (SVB Financial Group)
- Silicon Valley Bank’s (SVB; NASDAQ: SIVB) ALM (asset and liability management) strategy analysis and pitfalls
- Missed stress testing and applicable frameworks for testing
- Expectations for deposit outflow options
- Similar breakdowns at Silvergate Capital (NYSE: SI) and Signature Bank (NASDAQ: SBNY), plus implications for VC industry
- Risk across other mid-sized regional banks and potential for similar failures
As someone who has worked at SVB [Silicon Valley Bank], can you guide us through the events leading to the bank’s closure over the last few days? Was any of it expected? Who’s to blame here?
You mentioned former SVB CEO Greg Becker sold a portion of his shares just weeks before the portfolio loss announcement. We also know he was part of the lobbying group a couple of years ago pushing to repeal some of the stringencies the Dodd-Frank legislation had on regional banks, SVB included. What would you be asking him today?
Former CEO aside, there is surely another system of risk mitigation built into the bank, but SVB had no CRO [Chief Risk Officer] for roughly eight months while the VC ecosystem was spiralling. What should we make of this? What level of elevated importance do you think solid corporate governance will play in the health of regional banks moving forward?
What might have been going wrong with SVB? How does that play into some of the silence we’ve witnessed over the last couple of days? We initially thought we were going to hear some sort of verdict on the buy-out by late Sunday 12 March 2023. It’s now Wednesday 15 March and we’re not quite there yet. What might be going on resulting in this delay? Might that have any connection to that long lag in replacing the CRO?
To circle back on the point about the CRO being absent for eight months, surely the CRO is not the only risk officer in a company. Where was the other oversight? How did that potentially pass through stress-testing that was done on the bank?
Do you think the quality of a management team will be key when looking at any regional banks moving forward? Is that a core constituent of the trust element regarding your bank?
You were in a risk capacity at SVB, focusing on business and product risk. During your time there, how would you evaluate the quality or approach to managing risk at the bank? Would you grade it as being conservative or rather loose? What other colour can you give us on its general risk management approach?
Silvergate’s recent liquidation may have been expected given its exposure to crypto. Given SVB’s exposure to the VC ecosystem, which has been on a downturn over the last year, it’s relatively reasonable to have imagined a heightened level of risk for it in the past year. I don’t think many people expected Signature to fall so quickly. People’s attention is now turning to who else may be caught in a similar situation. How would you build a framework to determine similar portfolio risk across the regional bank landscape? What are the main variables or KPIs you would use to triangulate what players might be most or least at risk of a similar outcome to SVB’s?
Examining median trends for a lot of regional banks prior to the last week, most analyses will tell you that, despite anticipated slow deposit growth, the credit side for most median regional banks is still deemed conservative and relatively healthy, and lending was not going out to risky players as it was back in the GFC [Global Financial Crisis]. Loan loss reserves were generally being fortified well in advance, and NPLs [non-performing loans] were also at a relatively low level. I’d argue that from the credit end, things seemed stable and in line. There seems to be something else missing that wasn’t pointing to red flags for a lot of analysts covering these regional banks. What would your response be?
I think we all thought that mid-sized regional banks are or would be okay, and no-one foresaw Signature Bank’s liquidation happening so soon. This was quite a large institution, with a significant amount of AUM [assets under management], and was a formidable player in the commercial real estate space. What can we learn from the company and its collapse? Was it perception of the company’s exposure to crypto? It was exposed, but at a minimal amount. Was it the brand perception of crypto that brought the concern to the bank, prompting a run on its deposits?
There are many other regional banks in the US that focus on commercial real estate. I think many observers are wondering if we should be considering them at risk and taking a step back. Could niche concentration on any one industry essentially place a regional bank in this high-risk bucket today?
How might recent developments actually be a good thing for the larger regional banks? Can we expect to see more consolidation?
Do you think any of the top five big banks are even in a position to acquire SVB, given potential “too big to manage” and over-consolidation concerns?
PNC is cash-strapped and has been in acquisition mode. What would be some of the arguments against a PNC buy-out?
Post GFC, we saw massive consolidation in the banking industry. From roughly 2008-20, the number of commercial banks in the US dropped by 2,800. We’re in the middle of another potential banking sector meltdown. What are your expectations for sector-wide consolidation?
Where do you expect deposit outflows from SVB, Signature and Silvergate to land longer term?
It’s been reported that a lot of deposits have moved to some fintechs such as Brex, and Mercury, another neobank focused on the business banking segment, has reported that it’s also heavily open to accepting deposits. How does it make sense that deposits are willing to be banked by a fintech rather than a bank that’s been around since the 80s?
How can we expect the VC ecosystem to be impaired following the events of the past few weeks? Has this impaired the relationship between banks and VCs, given the role VCs played in perpetuating the run on SVB’s deposits?
One factor being critiqued as overlooked was the rapid growth in deposits at SVB. This was really a result of increased VC financing a couple of years ago. How might banks view heavily VC-backed deposits differently moving forward, given the potential high beta associated with them?
In the nature of speculation and the expectation of higher risk management, can you expect regional banks to reduce their tech or VC banking divisions if they have them? How difficult could it become for a tech company to secure lending moving forward, given the stigma of the past couple of weeks?
Could you discuss the questions around the clean bill of health KPMG gave SVB just a couple of weeks ago? How might that A grade of health, in light of what was revealed over the last couple of days, impact the legitimacy of firms who are meant to audit the performance and relative function of banking players?
We saw a rebound in regional bank stocks on 14 March 2023. What’s your outlook for contagion? Who are you closely monitoring that you may expect to suffer similar problems?
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