SVB’s assets are being acquired by First Citizens Bank over the weekend. First Citizens will take over all the SVB’s deposits and take over $72B of SVB’s loan book for $56.5B, a $16.5B discount. ~$90B’s HTM securities aka those long-duration agency MBS and treasuries will remain with the receivership. The FDIC agreed to share any of First Citizens’ losses or potential gains on SVB’s commercial loans. Overall, the FDIC estimated it will lose ~$20B by making all SVB depositors whole. Can they do this without using taxpayers’ money? That remains to be seen.
There’s an ongoing investigation about SVB’s debacle. The Fed published a prepared testimony by Michael S. Barr, Vice Chair for Supervision. Mr Barr called SVB a textbook case of mismanagement. The most striking part of the testimony is that regulators knew SVB was badly managed but they were not able to get SVB to fix all the glaring issues. It sounded like the SVB management ignored regulators’ advice and the regulators in charge were not empowered to force the necessary changes. Here is the part that shows how SVB management ignored the regulators:
The picture that has emerged thus far shows SVB had inadequate risk management and internal controls that struggled to keep pace with the growth of the bank. In 2021, as the bank grew rapidly in size, the bank moved into the large and foreign banking organization, or LFBO, portfolio to reflect its larger risk profile and was assigned a new team of supervisors. LFBO firms between $100 billion and $250 billion are subject to some enhanced prudential standards but not at the level of larger banks or global systemically important banks (G-SIBs).
Near the end of 2021, supervisors found deficiencies in the bank's liquidity risk management, resulting in six supervisory findings related to the bank's liquidity stress testing, contingency funding, and liquidity risk management.4 In May 2022, supervisors issued three findings related to ineffective board oversight, risk management weaknesses, and the bank's internal audit function. In the summer of 2022, supervisors lowered the bank's management rating to "fair" and rated the bank's enterprise-wide governance and controls as "deficient-1." These ratings mean that the bank was not "well managed" and was subject to growth restrictions under section 4(m) of the Bank Holding Company Act.5 In October 2022, supervisors met with the bank's senior management to express concern with the bank's interest rate risk profile and in November 2022, supervisors delivered a supervisory finding on interest rate risk management to the bank.
In mid-February 2023, staff presented to the Federal Reserve's Board of Governors on the impact of rising interest rates on some banks' financial condition and staff's approach to address issues at banks. Staff discussed the issues broadly, and highlighted SVB's interest rate and liquidity risk in particular. Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank's vulnerability was not apparent until the unexpected bank run on March 9.
Basically, SVB management fucked up big time. It didn’t matter how much service SVB provided to the tech and startup ecosystem. SVB was a bank and they didn’t even get the basics right. Regulators warned them repeatedly but they did nothing until it was too late. It’s either incompetence or hubris or both. By looking at how SVB managed itself, it’s clear that it’s really just a matter of time before the management blows the bank up. It happened to occur two weeks ago. But if it didn’t happen then, it will surely happen sometime in the future.