Case Study: The Board of Silicon Valley Bank

The collapse of Silicon Valley Bank in March 2023 provides some warnings and insights for Boards of Directors, and provoked much analysis and reflection from risk professionals and board directors. The collapse of SVB, the sixteenth largest bank in the US, was largely due to risk management failures, and led to the FDIC suing former executives and 11 former directors to recover billions of dollars for alleged negligence and breaches of fiduciary duty. The FDIC noted that executives and directors ignored "fundamental standards of prudent banking and the bank's own risk policies in letting the bank take on excessive risks to boost short-term profit and its stock price."

As a bank with over $50 billion in assets, SVB was required to have a risk committee reporting to the board, which in turn was required to have an experienced risk professional. As Major, Lindsey and Africa reported: "SVB's collapse was primarily a result of the bank failing to properly assess and manage risk and the board's failure to recognize the magnitude of risk exposure created by investment decisions during a period of rapidly rising interest rates. It's important that board learn from this experience and proactively take steps to ensure their risk committee and risk management team are not set up to fail."

The Global Risk Institute listed five lessons for boards based on an analysis of the failure of SVB, which we briefly describe here.

1. Never lose sight of financial risk management. SVB was heavily exposed to treasury bonds and was caught out when interest rates rose in 2022 and 2023, despite receiving several warnings from the Federal Reserve about its risk management systems over the preceding three years.

A run on deposits forced the bank to sell a $21 billion securities portfolio to balance the books, but it was unable to raise capital to cover the losses, leading to voluntary liquidation. "It was unclear," wrote GRI, "how much the board was made aware of the large unrealized losses within SVB's fixed-income securities portfolio, or the repricing mismatch of these long-term assets being supported by ever-increasing customer deposit rates."

2. Keep on top of key person risk and succession planning. In the case of SVB, the CRO position was empty between April 2022 and January 2023, leaving the bank vulnerable at a critical time. The new CRO was only appointed a few weeks before the collapse. The CRO reports to the CEO. One lesson is that boards cannot serve as proxies or substitutes for critical executives.

3. Social media has changed the nature of a bank run. Boards should be conscious of the new power of digital bank runs. During the financial crisis of 2007-08, images of people queueing for their money outside Northern Rock in the UK were reminiscent of bank runs in previous generations. Rumours of problems about Silicon Valley Bank started to spread among customers on Twitter and in WhatsApp groups, prompting many to transfer balances to other banks. GRI noted that the "broader issue of the psychology of a bank run magnified by social media needs much more attention from management, Boards and regulators." To this point we might add the importance of having a board member with a deep understanding of digital technologies, their applications in banking, and their adjacent applications now that banks are leaning into digital ecosystems.

4. Update perspectives on portfolio concentration. In this case, SVB was highly concentrated in the Silicon Valley outside San Francisco, who also shared WhatsApp groups and followed each other on social media, magnifying the speed of the bank run once rumours started.

5. Understand your capital management toolkit. Related to the above point, boards must be aware of processes and due diligence. This includes being aware that "sitting on undisclosed bad news while trying to raise capital will expose directors to legal liability and cause the institution serious reputational harm."

Finally, there can be opportunity in such disasters – for other banks and tuned-in boards. HSBC UK acquired Silicon Valley Bank's UK subsidiary for a nominal amount over the course of the weekend following the bank run.