FDIC Is Probing Management’s Conduct in SVB, Signature Bank Failures

The Federal Deposit Insurance Corp. has launched investigations into managers’ conduct in the Silicon Valley Bank and Signature Bank failures.

(Bloomberg) — The Federal Deposit Insurance Corp. has launched investigations into managers’ conduct in the Silicon Valley Bank and Signature Bank failures.

“It is worth noting that these two institutions were allowed to fail,” Martin Gruenberg, the agency’s chairman, said in prepared remarks for a Senate Banking Committee hearing set for Tuesday. “Shareholders lost their investment. Unsecured creditors took losses. The boards and the most senior executives were removed.”

As Gruenberg and Michael Barr, the Federal Reserve’s vice chairman for supervision, provided reassurances that the financial system is sound, they also came out swinging hard against managers of the collapsed banks. 

Barr, who’s leading a Fed review of what led to Silicon Valley Bank’s collapse, called the lender’s collapse a “textbook case of mismanagement.” He pointed to a concentrated business model catering to tech and venture-capital firms, a failure to manage the risks of liabilities, and the bank’s significant asset and deposit growth.

“The bank invested the proceeds of these deposits in longer-term securities, to boost yield and increase its profits,” he said in his prepared remarks for the hearing. “However, the bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models, and metrics.”

Barr said SVB waited too long to tackle its issues, and when it did, “ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure.”

The FDIC stepped in and took control of the two lenders earlier this month as depositors yanked money from the two lenders.  

Gruenberg said the FDIC can probe and hold accountable the directors, officers, professional service providers and “other institution-affiliated parties” for losses tied to the banks, as well as any misconduct in the management of the banks.

“The FDIC has already commenced these investigations,” he said.

The 10 largest deposit accounts at Silicon Valley Bank held a total of $13.3 billion, Gruenberg said. 

Losses to the FDIC’s Deposit Insurance Fund tied to uninsured deposit insurance coverage will be repaid through a special assessment on banks. The regulator is reviewing the deposit insurance system and plans to release a report by May 1 that will consider the coverage levels and excess deposit insurance, Gruenberg said. The agency plans to seek public comment on the assessment in May.

A coalition of midsize banks has asked regulators to lift the $250,000 cap on deposit insurance for the next two years, saying it’s needed to stop the outflow of deposits from smaller banks. 

(Adds details on SVB deposits, FDIC review in last three paragraphs.)

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