With money from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to extract profits that quickly set off an internal alarm.

By buying long-term investments that paid more interest, SVB had fallen out of compliance with a key risk measure. An internal model showed that higher interest rates could have a devastating impact on the bank’s future performance, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations.


Instead of heeding that warning — and over the concerns of some employees — SVB executives simply changed the model’s assumptions, according to former employees and securities filings. The adjustments, which have not been previously reported, initially predicted that rising interest rates would have minimal impact.

The new assumptions validated SVB’s profit-driven strategy, but they were deeply misplaced. Over the past year, interest rates have risen nearly five percentage points, the fastest rate since the 1980s. Meanwhile, the tech industry has entered a post-pandemic swoon, causing SVB’s elite clientele to cash out much faster than bank executives had expected.

On March 8, the bank was forced to raise additional cash by selling securities at a loss of $1.8 billion. It caused panic among SVB customers, who staged one of the biggest banking risks in US history. Fantasized by social media, depositors tried to withdraw $42 billion in a single day. The next morning, the bank collapsed and federal regulators took control.

The episode shows that managers knew early on that higher interest rates could jeopardize the bank’s future results. Instead of changing course to mitigate that risk, they doubled down on a strategy to deliver profits in the short term, showing an appetite for risk that set the stage for SVB’s stunning meltdown.

“Management has always wanted to tell a growth story,” a former employee of the bank’s said risk management. “Every quarter there was always this pressure to deliver revenue.”

The new revelations come as lawmakers and regulators examine what a senior Federal Reserve official called a “textbook case of mismanagement” leading to the nation’s second-largest bank failure. Much of their focus will turn to the arcane world of managing interest rate risk.

SVB’s new forecasts came into effect last year and assumed cash flow from deposits would remain consistent for longer, mitigating projected bite off higher interest rates. Before changing the model, a 2 percent increase in interest rates would reduce a measure of future cash flows by more than 27 percent; afterward, the hit was less than five percent, according to the bank’s securities filings.

The impetus for the change in assumptions was Dan Beck, SVB’s chief financial officer, according to a former employee, and it was approved by the bank’s Asset Liability Management Committee, which manages interest rate risk, both former employees said. The change made several mid-level bank officials uncomfortable, one person said, although there was historical deposit data to back it up.

Attempts to contact Beck were unsuccessful, and lawyers representing him in a lawsuit did not respond to requests for comment. Efforts to contact Michael Kruse, who chaired the bank’s Asset Liability Management Committee, according to the former employees, were also unsuccessful.

One of the former employees said changed assumptions about interest rate risk were shared with federal and state regulators in late 2021 or 2022.

An official with the California Department of Financial Protection and Innovation said they could not comment on “confidential regulatory information.”

Michael Barr, the Fed’s vice chairman for supervision, testified before a Senate committee on Tuesday that its supervisory team cited the bank for “ineffective board oversight” and “weaknesses in risk management” in May. A spokesman for the Federal Reserve declined to comment beyond those public statements.

SVB was a financial pillar in Silicon Valley start-ups, lending money to companies with unproven business models but high potential for growth. As SVB prospered alongside the start-ups it helped, top executives increasingly saw themselves as part of the industry they served and prioritized high-flying returns, according to current and former employees. For a time, they succeeded: The share price of SVB Financial Group, the bank’s holding company, tripled in less than two years as deposits grew at breakneck speed.

Greg Becker, SVB’s executive director, received enthusiastic statements about the outlook for startups and tech companies, even during the recent shutdowns. He saw himself as more venture capitalist than banker, according to some who know him.

“He’s looking to take some risks to make effective investments in companies, which is not how banks normally make them,” said a longtime venture capitalist who often traded with Becker, who spoke on the condition of anonymity to preserve Silicon Valley relationships. the financial world. “It’s fair to say he was more focused on upside than risk management.”

A spokesman for Becker declined to comment for this article.

SVB’s rapid growth during the first year of the pandemic created several strains. The bank had to invest a mountain of customers’ cash in a time of rock-bottom interest rates. To maximize its returns, the company bought long-term mortgages and government-backed securities that pay higher interest than what the bank passed on to its depositors, allowing it to post sparkling financial results every quarter for two years.

In an apparent bet that interest rates would fall last autumn, SVB sold at a profit the financial instruments it used to hedge against the risk of higher interest rates, according to a company presentation. Instead, the opposite happened: the Federal Reserve started raising interest rates more aggressively last summer to curb inflation. It reduced the value of SVB’s securities portfolio, which meant that the bank would make a loss if it were to sell.

“They thought they could never go wrong,” said a former bank official who spoke on condition of anonymity to discuss internal business practices, recalling an internal stress test in late 2018 or 2019 that showed SVB could lose at least a third of their deposits over two years. Leaders ordered that model to be reworked as well. “If they see a model they don’t like,” the official said, “they scrap it.”

Kate Mitchell, a venture capitalist and chair of the SVB board’s risk committee, did not respond to a request for comment.

Customer deposit behavior is a key variable that banks use to develop risk models. One measure, closely tracked by banks and their auditors, estimates future cash flows and how sensitive they are to changes in interest rates. It was this measure, called the economic value of equity, that triggered a warning in mid-2020, according to the former employees.

SVB hired a consultant, Curinos, to review its interest rate risk model, according to former employees. The bank first revealed the review of its model in May and completed the change in the second quarter of 2022. But at the end of the year, SVB omitted the economic value of equity – which it had been reporting for a decade – from the public. interest rate analysis.

Curinos declined to comment on whether it did any work for SVB, adding in a statement that the company works with banks and “routinely analyzes customer behavior to assess the likelihood that their balances will change based on various stimuli, such as interest rates.”

When it comes to catering to startups and technology companies, the bank had fewer customers than most banks of its size. At the end of last year, 93.8 percent of SVB’s deposits were above the Federal Deposit Insurance Corp.’s limits and thus uninsured, the highest percentage among major US banks, according to S&P Global. That made it more vulnerable to customers pulling their money, some felt.

In April 2022, SVB parted ways with its chief risk officer of almost six years, Laura Izurieta. The bank said it “initiated discussions with Izurieta about a transfer” in early 2022 and that she stayed further to help with “transition-related tasks” until October. SVB did not disclose this until March 3, when a securities filing revealed that it did not hire a new chief risk officer until the end of December.

Izurieta did not respond to requests for comment.

As recently as July, Beck, the company’s chief financial officer, said on an earnings call that “we remain well positioned on the upside for higher interest rates.” But the pressure increased on SVB as interest rates rose faster than the company had anticipated.

When the company filed its quarterly report the following month, it revealed that its long-term securities — which account for about 45 percent of its total assets — had an unrealized loss of $11.2 billion, up dramatically from an unrealized loss of $1.3 billion dollar just six months earlier. Three months later, unrealized losses totaled nearly $16 billion.

To compound SVB’s problems, the bank paid higher interest rates to prevent customers from withdrawing their money while borrowing at higher interest rates.

At the end of 2022, SVB’s deposits cost the bank almost twice as much as the median among a group of peers, according to Moody’s.

Some on Wall Street noticed, too. Chris Kotowski, an analyst at Oppenheimer & Co., downgraded SVB’s stock from buy to hold last September after the bank indicated that its income from interest payments was under pressure.

“It just set off alarm bells for me,” Kotowski said.

With SVB’s earnings squeezed by higher deposit and borrowing costs, investors lowered their shares, prompting executives to air their views to Wall Street analysts.

JPMorgan Chase & Co. analysts hosted a webinar last November with Beck, SVB’s chief financial officer, who addressed investor concerns for nearly two hours, according to a research note the bank sent to clients. The analysts concluded that the decline in deposits was manageable and SVB had plenty of liquidity without having to sell securities at a loss “even if a worst-case scenario unfolds.” As recently as January, JPMorgan predicted a turnaround for SVB and advised clients to buy the stock.

A week before the bank failed, in its annual report to shareholders, SVB praised its top managers for one area of ​​performance: managing risk.

Becker, the CEO, had shown “strong leadership for the continued evolution of risk management.” Beck, the CFO, was credited with “fostering a strong risk culture.”

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