U.S. Senators said Tuesday the chief executive officers of Silicon Valley Bank and Signature Bank took risks to boost short-term profits and placed their interests ahead of shareholders and deposit holders in the collapse of the two banks.
Former Silicon Valley Bank CEO Gregory W. Becker and ex- Signature Bank CEO Scott A. Shay both said they have been personally devastated by what happened to their banks and that much of the collapse was due to factors beyond their control. These included the speed of withdrawals through smartphones that caused an unprecedented run on deposits fueled by social media.
Silicon Valley Bank failed on March 10 when it was taken over by the Federal Deposit Insurance Corp. as the second-largest bank failure in U.S. history at the time, after Washington Mutual during the 2008 financial crisis.
Neither bank CEO said they would pay back any compensation at this time, but Becker said he’d cooperate with regulators on any future requirements.
Democratic Senators Elizabeth Warren of Massachusetts and Chris Van Hollen of Maryland pointed to legislation filed in March to claw back compensation of the executives at the two failed banks and urged Congress to consider the measure.
Senators from both parties grilled Becker and Shay for not following basic “Banking 101” practices to protect against rising interest rates and other challenges, but differed on the role of regulators in the banking crisis.
Democrats pointed to a move to loosen bank regulations during the Trump administration as a cause, while Republicans pointed at potential missteps by the Federal Deposit Insurance Corp and the Federal Reserve.
Senators focused their criticism on management failures such as Silicon Valley Bank’s decision to sell hedges that would protect its assets from the risk of risking interest rates.
“This was bone deep down to the marrow stupid,” said Republican Sen. John Kennedy of Louisiana. “You put all your eggs in one basket and unless you were living on the International Space Station you could see interest rates were rising and they weren’t hedged.”
Kennedy also played an internal employee morale video from Signature Bank that had been covered in media reports with bankers singing about making a bank from scratch and how nothing could possibly go wrong.
Senators zoomed in on Silicon Valley Bank’s 31 supervisory findings from federal bank regulators that had not been fully resolved, yet Silicon Valley Bank CEO Becker still received a $1.5 million bonus as part of his 2022 compensation package.
Several also mentioned that the bank operated without a chief risk officer for much of 2022, as well as stock sales conducted by Becker shortly before his bank collapsed.
Sen. Tim Scott, Republican of South Carolina, said the decision by Silicon Valley Bank to operate without a chief risk officer “was a recipe for disaster” and that the bank’s 31 unresolved matters with regulators amounted to a “flashing red light that something was desperately wrong.”
Committee chair Sen. Sherrod Brown, Democrat of Ohio, said the explanations from Becker and Shay “sound a lot like the dog ate my homework.”
Sen. Van Hollen said Silicon Valley Bank’s stock price fell in 2022 and it sold interest rate hedges at a time when the U.S. Federal Reserve was hiking interest rates.
“What the facts suggest that in the face of declining profitability you and the bank decided to artificially goose your profits by making these sales which put the bank in a much more precarious situation in regard to interest rate risk,” Van Hollen said.
“When the board provided the bonus one of the things they considered was the short-term bump in the sales of these assets. The bonus was received in the end as a result of taking the risky behavior that ultimately led to the collapse of SVB and led to the FDIC having to come in to support depositors.”
Becker said he owned more stock in his own company than other CEOs because he believed in its future and its value went to zero after the bank failed.
Becker said his compensation was set by his board’s pay committee and declined to say whether he disagreed with the board over his pay.
The unprecedented risks that sparked the bank’s failure included the U.S. Federal Reserve’s rapid rise in interest rates in 2022, and a “social media” run on the bank after Silicon Valley Bank announced plans to raise capital on March 8. Becker also blamed negative headlines around Silvergate Bank, which announced plans to liquidate at that time.
The bank handled $142 billion in deposit outflows over two days. On March 12, Becker was terminated at the bank by the FDIC. Becker said he offered to work with the FDIC to assist in any way possible but was rejected.
The repercussions of the collapse of Silicon Valley Bank, Signature Bank and Silvergate Banks have continued in the banking system, with the sale of First Republic Bank to JPMorgan Chase
and further pressure in the stock market on PacWest Bancorp
Western Alliance Bancorp
and other regional-bank stocks.
Meanwhile, the FDIC last week estimated that the bailout of uninsured depositors at Silicon Valley Bank and Signature Bank cost the insurance fund $15.8 billion, and the special assessment is aimed at recouping that amount over a two-year period beginning in June 2024.