The Federal Deposit Insurance Corp. (FDIC) has initiated legal action against 17 former executives of Silicon Valley Bank (SVB), alleging severe mismanagement of risk that contributed to the bank’s collapse in March 2023. The lawsuit, filed in the U.S. District Court for the Northern District of California, highlights key corporate governance and risk management failures, including improper handling of interest rate and liquidity risks. The case underscores broader regulatory concerns about risk oversight in banking institutions as new leadership raises questions regarding future regulatory direction.
What triggered the FDIC’s legal move?
The FDIC’s decision to file the lawsuit follows a unanimous vote by its board of directors to pursue legal actions against SVB’s former leadership. The agency claims these executives, including the bank’s former CEO, CFO, and chief risk officer, mismanaged crucial aspects of the bank’s operations, such as its securities portfolios. Allegedly, long-dated securities were purchased despite rising interest rates, and interest rate hedges were improperly removed. These decisions reportedly left SVB’s financial health exposed to significant risks.
Why did SVB struggle to manage its deposits?
The FDIC points to the composition and concentration of SVB’s deposit base as a major vulnerability. By the end of 2022, the majority of SVB’s deposits came from venture-capital-backed firms, with over 94% of these deposits uninsured due to exceeding the $250,000 FDIC insurance limit. The lawsuit claims such deposits were inherently unstable, especially given the volatile liquidity profiles of the industries SVB primarily served. This instability, coupled with deficient oversight and stress testing practices, made the bank susceptible to rapid withdrawal events and market confidence loss.
This legal action aligns with findings from earlier regulatory reviews, which had identified weaknesses in SVB’s risk management infrastructure. Federal Reserve and state regulators had previously flagged the bank’s rapid growth, which outpaced its ability to manage liquidity risks effectively. Allegations have surfaced that the bank’s leadership manipulated internal risk models to obscure policy breaches rather than addressing them, exacerbating its vulnerabilities.
Reports from earlier this year also cited the role of external factors, such as social media and digital-first banking, in accelerating the bank run on SVB. These elements heightened the speed of customer withdrawals once concerns about the bank’s liquidity surfaced, highlighting how modern financial systems amplify traditional risks.
The FDIC’s lawsuit reflects heightened scrutiny of risk management protocols within financial institutions, especially as regulators adapt to evolving banking models. Questions persist about whether SVB’s collapse signals broader systemic issues or represents a unique case of corporate mismanagement.
This development serves as a reminder for banks to invest in robust risk management frameworks that account for deposit stability and interest rate sensitivity. Executives must also prioritize transparency in their operations to maintain regulatory compliance and public trust. For stakeholders, this case underscores the importance of monitoring risk metrics and evaluating management decisions against existing policies to avoid similar pitfalls.
