Senators slammed former executives from Silicon Valley Bank and
Signature Bank
on Tuesday for failing to recognize the warning signs leading up to two of the biggest bank failures in U.S. history in March, and criticized the millions they received in executive compensation.
But the executives repeatedly blamed the collapse of their banks on unprecedented deposit runs in the hours and days before regulators seized them.
Gregory Becker, the former CEO of Silicon Valley Bank, told the Senate Banking Committee that rapid interest rate increases and media coverage played a central role in the collapse of SVB. Becker, who spent nearly 30 years as an SVB employee, said he never envisioned what would ultimately happen to the bank.
Committee Chair Sen. Sherrod Brown (D., Ohio) said the banks grew too fast, with SVB tripling in size between 2019 and 2021 and Signature Bank doubling in size. “Good bankers know that banks can’t safely grow that fast.”
The collapse of the banks, just days after the crypto-focused bank
Silvergate Capital
said it would shut down, and just weeks before the collapse of
First Republic Bank,
has sent shock waves through the U.S. banking system, stoking fears about the health of the industry.
Now lawmakers are calling for regulatory changes, seeking compensation clawbacks and other measures they say will prevent other bank executives from taking excess risks.
In addition to Becker, Tuesday’s hearing in the Senate included appearances by Scott Shay, the co-founder and former chairman of Signature Bank, along with Signature’s former President Eric Howell. Most of the lawmakers addressed their questions to Becker, focusing on his role and his executive compensation.
Brown noted that the Federal Reserve, the Federal Deposit Insurance Corp., and state financial regulators had identified the aggressive growth of the two banks as a risk years before the failures, including the unstable nature of their large proportions of uninsured deposits, totalling more than 90% of deposits at each bank.
The Federal Reserve cited uninsured deposits as a risk at SVB as far back as 2018, but the bank never fixed it. “It looks like you never even tried,” Brown said.
Depositors withdrew about $42 billion the day before SVB’s closure, with another $100 billion set to fly out the door the day it was seized by regulators, about 80% of deposits in a two-day span.
“I do not believe that any bank could survive a bank run of that velocity and magnitude,” Becker said.
Sen. Chris Van Hollen (D., Md.) questioned Becker about a $1.5 million bonus for 2022. “Do you think you deserved that?” he asked. Becker replied that his bonus was determined by the bank’s board of directors based on his performance, and that the decision was fair.
Becker was a director of SVB in 2022, and had been since 2011, according to the bank’s proxy last year.
Van Hollen said the committee was looking at ways to claw back executive compensation. “This is why people have very little faith in the financial system,” he said.
Sen. Elizabeth Warren (D., Mass.) noted that SVB’s failure cost the FDIC insurance fund $20 billion, and said unless lawmakers act, bank CEOs will be able to keep loading up their banks with risk, receive tens of millions of dollars in bonuses and stock options, and “everyone else is going to have to pay for it.” She has proposed legislation to “make it a little less profitable for bank CEOs to blow up” their banks.
Silicon Valley Bank, founded in 1983 and based in Santa Clara, Calif., concentrated on banking services for start-ups and later-stage privately-backed companies, including nearly half of venture capital-backed technology and life sciences companies.
SVB’s growth accelerated after the government’s economic stimulus in response to the Covid-19 pandemic. But it was caught off guard by the Fed’s signals on interest rates. While rates were low, it bought long-term government securities. The value of those holdings eroded as interest rates began a rapid climb last year that would take the benchmark rate from near zero to above 5%.
When Silvergate Bank announced on March 8 that it would wind down and liquidate, depositors triggered a run on that bank. Becker blamed media reports that compared Silvergate and SVB for rumors that ultimately led to its own deposit run and closure on March 10. Signature was seized two days later.
Signature’s co-founder Shay and Howell said they believed Signature could have withstood its own deposit run because it was well-capitalized. But regulators thought otherwise.
In response to numerous questions about how much executives bear responsibility for what happened at their banks, all three witnesses blamed the banks’ failures on the unprecedented and unpredictable run on deposits by individuals. Shay told Warren: “I believe that Signature Bank was a responsibly managed bank.”
Brown closed the hearing by noting that the longtime former bank executives “blamed pretty much everyone else for your banks’ failures,” and that both banks suffered from a lack of willingness to “solve known problems.”
In a separate, concurrent hearing on Tuesday, banking regulators were tesitifying in the House Financial Services Committee on the collapses and their supervision of the banks.
Fed Vice Chair of Supervision Michael Barr has already described SVB’s collapse to the Senate as a “textbook case of mismanagement.” He and three other regulators appeared at the House hearing.
Becker and Shay are scheduled to testify to the House Financial Services Committee on Wednesday at 10 a.m., along with state banking regulators from New York and California.
Write to Janet H. Cho at [email protected]
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