One of the dominant news items of the past week or so was the Silicon Valley Bank Collapse. It caused a level of panic around the world, understandable as it’s a high profile bank which was focused on providing finance to the tech and venture capital sectors, and the collapse was viewed as the largest institutional failure since the financial crisis of 2008.
Recognising the danger of a loss of general investor confidence and this spreading, the US regulators stepped in to take control of the bank and President Biden announced that the government would cover all deposits in the US, while in the UK, a deal was struck whereby HSBC took control of its UK operation.
So, sighs of relief all around, but hopefully this will encourage close scrutiny of the operations of Silicon Valley Bank (SVB) for it appears that the problems were caused by a lack of appropriate governance and oversight and were arguably compounded by the actions of senior executives who sold significant volumes of shares in the days before the problems came to light.
What Happened?
SVB’s customers come from its roots in San Francisco where it was founded and focused on smaller, often start-up, businesses that were not attractive to mainstream banks. Of course, many of these companies flourished (Cisco being a great example) and the bank grew strongly over the years, but kept a focus on tech companies and the venture capital sector – companies that were generally vulnerable to stock market sentiment and would need access to cash when markets turned.
Like any bank, depositors’ funds were invested, with a good portion of these being in government bonds – generally considered a safe haven. However, a ‘perfect storm’ of fast-rising interest rates and a downturn in tech stocks, coupled with venture capital funding drying up meant that companies started accessing their cash deposits more aggressively. This was exacerbated when rumours on Twitter advising depositors to withdraw funds caused a real run on the bank.
As the demand for cash grew so SVB needed to sell assets to meet this demand – but its bond holdings were purchased before the interest rate push and so had to be sold at a loss.
The losses mounted quickly and SVB found itself technically insolvent. It tried to tap outside investors to raise additional capital but was unsuccessful, and the regulators had no real option but to take over the bank, and the US President then calmed markets by announcing that all deposits would be fully guaranteed by the Treasury, preventing a potential run on other banks.
It had taken just 36 hours from the first rumours on Twitter to the ban being closed, in effect.
So, was this just bad timing by SVB, or was there more to it than luck?
The Board
As I’ve discussed before, a company’s board has a number of duties – strategy and risk oversight being among the most important. Questions that arise for the board to answer include:
- Was the customer focus on the tech sector, particularly start-ups, and venture capital overly risky, and should SVB have been looking for a more diverse mix of customers – companies that are in different industries and geographies and so potentially more stable at times when the tech segment is weak?
- Why was nothing done about the weight of bond assets, generally purchased at a time when interest rates were a lot lower, and so showing a loss of value? A sharp rise in interest rates had been forecast for some considerable time so diversifying its investment portfolio should have been a key risk management factor for SVB.
- Were the bank’s general liquidity levels appropriate for its mix of customers, and when tech stocks turned down, why was liquidity not increased?
- Why was the board’s succession planning so poor? SVB Financial’s Chief Risk Officer stepped down in April last year and the post was not filled until January of this year – all this at a crucial time for risk as interest rates were rising strongly and venture capitalists were pulling back as a result. How seriously was risk management being taken?
The Executives
Compounding the Board’s apparent lack of proper oversight, it has emerged that SVB executives and directors sold some $84 million of the bank’s stock in the past two years, nearly $30 million by the CEO alone, who sold $3.6 million worth on February 27th, just a few days before the bank’s collapse. Coincidentally, perhaps, the CFO also sold shares that day – almost $600 000 worth.
This at a time when they must surely have known the trouble the bank was in. Is this not a classic case of insider trading?
So, What Next?
Well, for the board and executive, some serious questions to answer. It appears that both the US Justice Department and the Securities and Exchange Commission are having a close look at what happened and how.
And a class action suit has now been filed against SVB’s parent company, its CEO and CFO, too.
However, actions against anyone complicit in the failure of SVB aside, the wider ramifications are worth considering.
Are other banks at risk – we’ve already seen the huge Credit Suisse have trading in its shares suspended after a sharp fall on Wednesday?
Will regulators demand tighter controls of banks, better oversight by their boards and executive, and what about the regulations around sale of shares by those on the inside?
There’s still a lot to play out here, but one thing is clear: boards and executives of companies need to take their responsibilities a lot more seriously.
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Following a career spanning >50 years in the technology industry across three continents, with three decades in CxO roles leading significant, sustained growth in revenue and profitability, I now work with successful owner-led businesses to further enhance their growth, profitability and business value.
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If you’d like to learn more, these related posts might be of interest:
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- Planning to De-Risk Your Business Against Future Threats
- The Role & Responsibilities of the Company Board
- Why a Proper Board is Essential, Even for Small Businesses
- Board Meetings not Bored Meetings!
- “Expect the best. Prepare for the worst. Capitalize on what comes.” – Zig Ziglar
- “There is nothing permanent except change.” – Heraclitus
- Drive your Business by Looking Through the Windscreen Not the Rear-View Mirror
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These articles might also be of interest:
- A risk management nightmare at Silicon Valley Bank
- SVB execs sold $84 million in stock over the past 2 years, stoking outrage over insider trading plans
- SEC and Justice Department are investigating SVB’s collapse, including insider stock sales
- Class action lawsuit filed against Silicon Valley Bank parent company
- Financial crisis redux: we’ve seen this story before
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