Back to General Resources

Examining the Failures of Silicon Valley and Signature Bank – Senate Banking Committee

Senate Banking, Housing, and Urban Affairs Committee

Examining the Failures of Silicon Valley Bank and Signature Bank

Tuesday, May 16, 2023

Topline

  • Democrats pressed the bank executives on their incentive structures and mismanagement. Republicans cited management failures but also criticized regulators for supervisory failures.
  • Members on both sides of the aisle pressed executives to return the bonuses and compensation they received leading up to their banks’ failures.

Witnesses

  • Gregory W. Becker, Former CEO, Silicon Valley Bank
  • Scott A. Shay, Former Chairman & Co-Founder, Signature Bank
  • Eric R. Howell, Former President, Signature Bank

Opening Statements

Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown emphasized that it is the bankers’ fault that Silicon Valley Bank (SVB) and Signature Bank (SB) failed so spectacularly. He noted federal and state officials repeatedly told the banks that they had problems, while bank executives failed to listen, and SVB and SB got too big, too fast. Brown cited the liquidity risks, the unstable nature of uninsured deposits, and the concentration of customer deposits as giant risks sitting in plain sight on the banks’ balance sheets. He explained how executives focused on profitability to the exclusion of everything else, adding that when the banks were on the verge of failure, they tried to cash out. Brown said SVB executives dumped millions of dollars in company stock in the days leading up to the crash and were paying out bonuses hours before regulators seized your assets. He noted the executives’ mismanagement was aided by Randal Quarles, the former Vice Chair of the Federal Reserve, who led the 2018, 2019, and 2020 regulatory rollbacks. Brown concluded that bank executives have been impervious to consequences for far too long and promised this would change immediately.

Ranking Member Tim Scott (R-S.C.)

In his opening statement, Scott criticized banking regulators for being asleep at the wheel. He outlined three major issues with the recent bank failures: bank mismanagement, supervisory failure, and rocketing inflation. Scott said he was shocked at the complete negligence and disregard for economic realities, noting SVB made significant bets on interest rates falling when everything indicated the opposite. He questioned why SVB failed to adapt to the increasingly vulnerable inflationary environment or hire a Chief Risk Officer (CRO). Scott criticized SVB for focusing on profitability, not stability, adding that Mr.

Becker’s lack of judgment shows that he should not have been running SVB. He noted the failure of SVB fed the bank run, leading to the liquidity crisis, and creating the contagion that impacted SB. Scott noted the banks were not responsive in addressing the FDIC’s concerns, and warned the executives are not above the law. He concluded by emphasizing that this is not the norm and pledged that the American banking system remains strong.

Testimony

Gregory W. Becker, Former CEO, Silicon Valley Bank

In his testimony, Becker said SVB’s failure was brought about by a series of unprecedented events, explaining that in 2020, due to near-zero interest rates and the largest government sponsored economic stimulus in history, more than $5 trillion of new deposits flooded into commercial banks. He discussed how by the end of 2020, SVB grew 63% before SVB’s assets grew another 80% by the end of 2021. He cited messaging from the Federal Reserve that interest rates would remain low, and inflation would be transitory, noting SVB invested in low-risk, government backed securities. Becker said news reports and investors wrongly lumped Silvergate Bank and SVB together, leading to rumors and misconceptions which spread quickly online, culminating in the first social media bank run and leading to roughly $42 billion in deposits being withdrawn from SVB in 10 hours. He concluded that SVB had a positive impact on the companies we supported, and noted the takeover of SVB has been personally and professionally devastating.

Scott A. Shay, Former Chairman & Co-Founder, Signature Bank

In his testimony, Shay discussed Signature Bank’s growth from a small bank with $40 million of start-up funds to a successful middle-market bank with more than $100 billion in deposits. He said they began accepting deposits from businesses in the digital asset sector in 2018, noting he supported this effort because he believed that digital asset payment systems can make financial transactions faster, easier, and cheaper. Shay said SB’s digital deposit business grew over time, but emphasized how SB carefully monitored the business in an effort to ensure that clients met internal standards, including compliance with anti-money laundering laws. He explained how SB’s digital asset business was focused on accepting U.S. dollar deposits from businesses in the sector, and highlighted his public support for increased government regulation of the digital asset sector.

Shay explained how SB significantly reduced its digital asset deposits in the latter part of 2022, as the digital asset sector experienced increased volatility and regulators expressed concern. He described the series of extraordinary and unprecedented events which unfolded quickly, leading SB’s depositors to withdraw $16 billion from the bank. Shay said he was confident that SB could withstand the economic earthquake that occurred on that day, noting the bank was well-capitalized and solvent. He said that while he believed that SB was in a strong position to weather the storm, regulators evidently saw things differently. Shay said he disagreed with regulators decision to seize Signature Bank, but was pleased that the government guaranteed the full amount of their customers’ deposits.

Eric R. Howell, Former President, Signature Bank

In his testimony, Howell said it was profoundly disappointing to see SB seized and closed. He noted that the unprecedented events of March 10, 2023, including the speed and amount of withdrawals, astonished SB. Howell said SB was well-capitalized, solvent, and had sufficient borrowing capacity to withstand these and future withdrawals. He explained that while he was disheartened that this did not come to pass, it is reassuring that the FDIC guaranteed the full amount of the Bank’s clients’ deposits. He discussed his service as President and Chief Operating Officer of Signature Bridge Bank, working to ensure the ongoing operations of the Bridge Bank and assisting in securing a sale of assets and liabilities to another bank.

Question & Answer

Risk Management

Brown asked if it ever occurred to Becker that new deposits funding SVB’s rapid growth could leave the bank as quickly as they came in. Becker said the growth was from existing clients, and that SVB added to their liquidity to ensure they had borrowing capacity.

Brown asked if there was any possible explanation other than Becker neglecting to fix SVB’s problems because it would have cut into his earnings. Becker said SVB took risk management seriously and was responsive to regulatory feedback.

Brown noted that SB had an extraordinary level of client concentration, where 60 clients held 40% of deposits and four depositors accounted for 14% of deposits. He asked if SB needed that kind of concentration to make quick profits. Shay said SB took steps to ameliorate concentration and tried to diversify their portfolio mix.

Scott said it’s hard to believe that SVB took risk management seriously when 90% of their deposits were uninsured.

Sen. Jack Reed (D-R.I.) said SVB repeatedly breached its internal risk limits for interest rate exposure for years and had shortfalls in its liquidity positions. He asked if Becker knew about these breaches and shortfalls. Becker said he didn’t recall the interest rate limits but remembered the liquidity issues. He said these breaches were all remediated except for one.

Reed asked if it was true that SVB did not have a risk officer in place for the last year. Becker said this was a mutual decision, but that SVB kept the former CRO on board as a consultant. He said a new CRO was hired in October and started in December.

Reed asked if the CRO warned SVB about the dangers that they were deliberately running, which led Becker to want them to be removed. He asked if the consultant fee was a convenient way to pay someone to go away. Becker said the feedback for making a change in the CRO position came from their board and regulators.

Sen. Thom Tillis (R-N.C.) asked what specific actions SVB took in response to supervisory findings, and how many of their MRAs and MRIAs were still outstanding at the date of their failure. Becker said there were 31 outstanding findings, but emphasized that SVB immediately reacted to liquidity risk findings and remediated the vast majority of these.

Sen. Catherine Cortez Masto (D-Nev.) noted that according to the FDIC, poor governance and risk management practices prevented SB from adequately managing liquidity risk and were the root cause of SB’s failure. She asked Shay and Howell if they agreed. Shay said no, arguing the root cause was the panic which triggered the run on SB. Howell said there was no mismanagement at SB, and that the unprecedented events stemming from SVB led to SB’s failure.

Interest Rates

Sen. Mike Rounds (R-S.D.) asked Becker to discuss SVB’s decision to stop hedging interest rate risk.

Becker said he didn’t have access to my documents because he was terminated and could not answer the question.

Sen. John Kennedy (R-La.) asked if the price of government bonds decrease when interest rates increase. Becker said yes. Kennedy noted SVB had 55% of its assets invested in government bonds when the Fed raised interest rates, causing the value of their assets to go down dramatically.

Sen. Kyrsten Sinema (I-Ariz.) asked Becker why other banks survived in the current interest rate environment while his bank failed. Becker said unrealized losses exist across the banking sector.

Sen. Katie Britt (R-Ala.) blamed the policies of the Biden Administration for shifting a recently thriving economy to an unprecedented inflationary environment, citing the challenges of high interest rates.

Britt asked when Becker began to see red flags regarding the long-term stability of SVB. Becker said capital was strong until the end, but that they started to see a slowdown due to the interest rates in Q1 of 2022.

Compensation

Sen. Bob Menendez (D-N.J.) noted that on January 26, Becker filed a 10b5-1 plan, and in accordance with that plan, sold $3.6 million in company stock 10 days before SVB failed. He asked if Becker was aware that SVB was in trouble when he filed the10b5-1? Becker said he was not.  

Menendez explained that bonuses were paid out hours before regulators seized SVB. He asked Becker if he believes he and his colleagues earned those bonuses, and if he intends to return any of the bonuses he received. Becker said the bonuses were predetermined and that he will cooperate with regulators.

Menendez said the incentive structure at SVB rewarded breakneck growth while kneecapping efforts to manage growing risks, and that he hopes to work on legislation to rein in risky incentive structures.

Sen. Chris Van Hollen (D-Md.) asked Becker if he believed he should have received a $1.5 million bonus in 2022, considering the bonus was a result of risky behavior which ultimately led to the collapse of SVB. Becker said his compensation was determined by the board’s evaluation of his performance. He added that he believes they were accurate in their evaluation.

Sen. Elizabeth Warren (D-Mass.) noted that in 2019, after Congress weakened the banking system’s guardrails, Becker got a 35% pay increase, even as the Fed warned his bank about 17 unresolved supervisory issues.

Warren said the collapse of SVB cost the FDIC fund about $20 billion, noting other banks and consumers will have to make up for this. She asked Becker how much of the $40 million he earned from loading SVB up with risk would be returned to the FDIC. Becker said he would cooperate with regulators.

Warren added that the FDIC identified 45 issues at SB from 2019 through 2023, while Shay received more than $20 million in compensation. Warren noted the collapse of SB cost the FDIC fund $2.5 billion, and asked Shay how much of the $20 million he would return to the FDIC. Shay said SB was a

responsibly managed bank, and that he would not return any of his compensation.

Warren said she, Sen. Cortez Masto, Sen. Hawley, and Sen. Braun introduced a bill to claw back these crazy executive paychecks and called on Congress to do the right thing and mark this bill up as soon as possible.

Sen. J.D. Vance (R-Ohio) asked Becker about his total cash bonuses from 2021 and 2022. Becker said he received $3 million in 2021 and $1.5 million in 2022.

Vance noted Becker received these bonuses despite SVB’s stock prices falling, and asked if it was appropriate to pay himself $1.5 million while the stock of his company declined by 65%. Becker said he held five times the amount of stock that he was required to, noting he was impacted by the decline in stock prices.

Vance asked about the total market value of the shares of SVB stock that Becker sold a couple of weeks before SVB was put into receivership. Becker said the value was $3.6 million. Vance asked if this was an ethical decision, noting American taxpayers and consumers will be paying higher banking fees because of the $20 billion the FDIC put into SVB. Becker said the sale was made under a 10b5-1 plan, which was entered into legally.

Britt asked if Becker would return his $1.5 million bonus back, adding the money should be anywhere besides in his pocket. Becker said he is committed to cooperating with the process.

Regulatory Supervision & Failures

Brown noted that when SVB failed it had 31 unresolved matters requiring attention, according to the Fed, telling Becker his explanations sound a lot like “my dog ate my homework.”

Rounds said these collapses were not just due to a failure of management, but also to a failure of the regulators and how they responded.

Rounds noted that in May 2022, the Fed issued three matters requiring immediate attention (MRIAs) which needed to be resolved by August 2022. He asked if SVB submitted the required remediation plan by the due date. Becker said yes, and that SVB was still waiting for specific feedback from regulators in March.

Rounds said that in November 2022, the Fed issued a matter requiring attention (MRA) for SVB’s interest rate risk, which found SVB’s interest rate simulations were unreliable and gave a false sense of safety in a rising rate environment. He noted this additional MRA did not require a response until June 2023, and asked if SVB interpreted that as the Fed softening their concerns. Becker: said that SVB was very responsive whenever they got any regulatory findings, to which Rounds replied their 30+ outstanding supervisory findings would suggest otherwise.

Sen. Bill Hagerty (R-TN) said this was a failure of supervision by the San Francisco Fed and asked how frequently Becker met with their supervisors. Becker said they met monthly, if not more frequently.

Sen. Daines (R-Mont.) said these collapses were the direct result of the failure of financial regulators and the inflationary environment. Daines said Congress needs to hold negligent regulators accountable.

Sinema said the Fed and FDIC need to make meaningful cultural changes to respond to problems faster and restore confidence in the system.

Hedging

Kennedy asked Becker if SVB had hedges. Becker said that decision was made by SVB’s asset liability committee. Kennedy replied that Becker was the CEO of the bank and asked again. Becker then responded that hedges were put in place, but that he didn’t recall the details.

Kennedy criticized Becker for not knowing whether the bank he led was hedged or not. He asked Becker if buying hedges would have cut into his profits. Becker said he didn’t know, to which Kennedy replied that hedges cost money, and if SVB made less money, which would have impacted Becker’s bonus.

Kennedy said Becker made a stupid bet that went bad and asked if the taxpayers of America had to pick up the tab for his stupidity. Becker said a series of unprecedented events occurred.

Van Hollen asked if Becker agreed that dumping billions of dollars in hedges in 2022 was a really dumb move. Becker said those decisions were overseen by SVB’s asset liability and finance committees, who were making the best decisions they could.

Van Hollen explained that in the face of declining profitability and falling share prices, Becker and SVB decided to artificially boost your profits by making hedge sales, putting the bank in a much more precarious position. He added this behavior is why people have very little faith in our financial system.

Digital Assets

Hagerty asked if SB was placed into receivership because of its exposure to the crypto industry and digital assets. Shay said he couldn’t speak for the regulators and their decision process.  

Hagerty asked if the FDIC sold off all of SB’s assets except for the digital portfolio. Shay said he didn’t know because he had no involvement in the sale.

Sen. Cynthia Lummis (R-Wyo.) noted there was a lot of blame placed on digital assets when SB failed. She asked if SB held or traded digital assets. Shay said no.

Lummis noted that SB had depositors who were in the digital asset industry, but their deposits were in cash and only made up about 18% of SB’s total deposits. She asked if Shay agreed that depositors who had nothing to do with digital assets made the majority of withdrawals during the run on the bank. Shay said yes.

Lummis noted that she is a proponent of state-chartered banks and the digital asset industries, and that there has been a lot of deflection of blame to digital asset depositors and regulators.

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.