Category Archives: federal reserve

Silicon Valley Bank Fails Due to Lack of Diversification, Weak Governance, and Hype – Creating a Bank Run

Fig. 1. Silicon Valley Bank Cash Transfer Vehicle, Justin Sullivan, Getty Images, 2023.

#svbfailure #svbbank #siliconvalleybank #cryptobank #venturetech #cryptofraud #bankgovernance #bankcomplaince #FDICSVB

Silicon Valley Bank Federal Deposit Insurance Corporation (FDIC) OCC California Department of Financial Protection and Innovation

The California Department of Financial Protection closed Silicon Valley Bank (SVB) on Fri 03/10/23 and the FDIC took control of and seized its deposits in the largest U.S. banking failure since the 2008 to 2012 mortgage financial crisis, and the second largest ever. Although SVB was well known in San Francisco and Boston where they had all of their 17 branches; they were little to known to the wider public. SVB specialized in financing start-ups and had become the 16th largest U.S. bank by assets. Their numbers at the end of 2022 were impressive with $209 billion in assets and approximately $175.4 billion in deposits.

As a precursor to their failure, SVB recorded six straight quarterly losses as economic conditions turned unfavorable. Then on Mon 02/27/23 their CEO Greg Becker sold $3.6 million of stock in a pre-arraigned 10b5-1 plan designed to reduce conflict of interest, yet it’s still potentially questionable due to the gain he got and the odd timing weeks before their collapse. Yet other executives that sold in recent weeks may not have the protection of the 10b5-1 and that would be a worse example of conflict of interest. 

Some degree of support is needed for SVB because most there are not to blame; but so too is criticism so that the financial system can get better and innovate in the free market. You cannot just blindly support people (mostly sr. mgmt.) and organizations (crypto tie in) who are largely responsible for startup failures, frozen loans and payrolls, huge job loss, loss of deposited money over 250k, and great economic downturn – all the while the SVB mgmt. team gets very rich.

Obviously, the competencies and character of some of the SVB mgmt. team was not as good as other community banks and credit unions who aggressively avoided and overcame such failings. They likely put in more work with a deeper concern for the community, clients, and regulatory compliance – generally speaking. These many small community banks and credit unions are often 90 or 100 plus years old and did not grow at as fast a pace as SVB – super fast growth equals fast failure. Conversely, SVB is only 40 years young and most of its growth happened in the later part of that period. This coming from a guy who has consulted/worked at more than 10 financial institutions among other things including bank launch, tech risk, product, and compliance.

The company’s downward spiral blew up by late Weds 03/08/23, when it surprised investors with news that it needed to raise $2.25 billion to strengthen its balance sheet. This was influenced significantly by the Fed rate increases which forced the bank to raise lending rates, and that in turn made it hard for startups and medium-sized businesses to find approved funding. SVB also locked too much of their capital away in low-interest bonds. To strengthen their balance sheet in a slightly silly and desperate move, SVB sold $21 billion in securities at a large $1.8 billion loss. The details, timing, and governance of this make little sense, since the bank knew regulators were already watching closely. As a result, their stock fell 60% Thurs to $106.04 following the restructuring news.

As would be expected this fueled a higher level of deposit outflows from SVB; a $25 billion decline in deposits in the final three quarters of 2022. This spooked a lot of people, including CFOs, founders, VCs, and some unnamed tech celebrities — most of who started talking about the need to withdraw their money from SVB. SVB had almost 90% of its deposits uninsured by the FDIC which is far out of line with what traditional banks have. This is because the FDIC only covers deposits up to $250k. In contrast, Bank of America has about 32% of its deposits not insured by the FDIC – an enormous difference of 58%.

Crypto firm Circle revealed in a tweet late Fri 03/10/23 that it held $3.3 billion with the bank. Roblox corp. held 5% of its $3 billion in cash ($150 million) at the bank. Video streamer Roku held an estimated $487 million at SVB, representing approximately 26% of the company’s cash and cash equivalents as of Fri. Crypto exchange platform BlockFi — who filed for bankruptcy in November — listed $227 million in uninsured holdings at the bank. Some other SVB customers included Ziprecruiter, Pinterest, Shopify, and CrowdStrike. VCs like Y. Combinator regularly referred startups to them.

Yet after these initial outflows people start talking negatively, the perception became greater than reality. It did not matter whether the bank had a liquidity crisis or not. Heard psychology created a snowball effect in that no one wanted to be the last depositor at a bank — observing the lessons learned from prior banking mortgage crisis from 2008 to 2012 where Washington Mutual failed.

In sum, customers withdrew a massive $42 billion of deposits by the end of Thurs 03/09/23, according to a California regulatory filing. As a result, SIVB stock continued to plummet down another 65% before premarket trading was halted early Fri by regulators.

The FDIC described it this way in a press release:

  1. “All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
  2. Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.”

That’s largely a bank run, and it is really bad news for SVB and many startups and medium businesses. SVB has been a foundational piece of the tech startup ecosystem. It was also known to industry commentators and tech risk researchers that SVB struggled with tech risk compliance, overall governance, and even had no chief risk officer in the eight months prior.

With reasoning and no direct evidence, only circumstantial evidence — as I had a couple of interviews with them and was less than impressed with their competency and trajectory — I speculate that crypto ties were a significant negative factor here because many of the companies and tech sub-domains SVB served are entangled with crypto and crypto-related entitles. Examples of this include their dealings with Circle — it manages part of the USDC stablecoin reserve of the American Circle, which confirmed to have a little more than $3 billion dollars of reserve blocked with SVB.

A Fri 03/10/23 Tweet from reporter Lauren Hirsch described BlockFi’s risky crypto entanglements with SVB this way: “Per new bankruptcy filing, BlockFi has $227m in Silicon Valley Bank. The bankruptcy trustee warned them on Mon that bc those funds are in a money market mutual fund, they’re not FDIC secured — which could be a prblm w/ keeping in compliance of bankruptcy law”.

Crypto compliance and insight for a big bank is very complex, undefined, and risk prone. The biggest tech venture bank has to be involved with a few crypto related failings and controversies, and the above are just a few examples but I am sure there are more. I just don’t have the data to back that up now, but I am sure it’s being investigated and/or litigated.

Note * This is a complex, evolving, and new development — some info may be incomplete and/or out of date at the time you view this.

About the Author:

Jeremy Swenson is a disruptive-thinking security entrepreneur, futurist/researcher, and senior management tech risk consultant. Over 17 years he has held progressive roles at many banks, insurance companies, retailers, healthcare orgs, and even governments including being a member of the Federal Reserve Secure Payment Task Force. Organizations relish in his ability to bridge gaps and flesh out hidden risk management solutions while at the same time improving processes. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. As a futurist, his writings on digital currency, the Target data breach, and Google combing Google + video chat with Google Hangouts video chat have been validated by many. He holds an MBA from St. Mary’s University of MN, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire.

Thought$ On The Future of Digital Curren¢y For A Better World

In the old days the gold standard was the way global economies secured their financial backing yet over time that got to be too costly to secure and too heavy to move. In all reality inflation and population growth far exceeded the amount of gold available for it to be widely used so nations moved away from the gold standard and adopted their own currencies and financial regulatory systems – for better or worse. Yet with growing curiosity around digital currency in conjunction with the decline of traditional cash usage I offer my commentary at an increasingly relevant time.

Figs. 1. and 2.
blog post small

Governments are wrong to assume all or most forms of digital currency are associated with illicit activity. We all know there have been bad actors out there in the digital currency space, and we know that some platforms like Silk Road have been attractive to them. Yet we must not forget that most bad actors use normal currency more often, and more importantly, the form of the currency is not as important as what the actor does with it.

Since we are at the beginning of the digital currency revolution it scares big governments who use traditional currencies to govern and collect taxes, and in some countries like Venezuela, Rwanda, Iraq, and Libya, they commit war crimes, financial fraud, and they steal from their citizens under the auspice of a legitimate financial system. In these countries, could a new more secure digital currency inspire a government revolution showing more transparency in currency movement and tax records sustaining democracy, human rights, and economic growth? The point here is that governments have abused their power to collect taxes and regulate financial services since the beginning of time. Didn’t the United States fight the Revolutionary War to stop excessive and unjust taxation from the British, and prior to the formation of the United States (July 4, 1776) the Thirteen Colonies had their own contradictory currencies, used the Spanish dollar, and counterfeiting was widespread by government and non-government people alike. Indeed governments should discourage immoral activity via legislation but not innovation in payment methodologies because lots of good can come from these new technologies. We as a world must think harder, longer, and we must inspire debate among global leaders for a better currency form in the future as paper cash is too darn simple and will soon grow more insecure due to better printer technologies observing the endless capabilities of the 3d printer.

Figs. 3. and 4.
Bit Coin Apple Pay
Conservative Wells Fargo led the industry in a surprise joint effort with Apple for the iPhone Apple Pay application in Oct. of 2014, setting a new standard with a mobile digital currency that has great security. Wells Fargo’s move to Apple Pay is a step closer to a digital currency and it is gaining traction and according to Forbes.com 10 major banks have now signed up for it (http://www.forbes.com/sites/roberthof/2014/12/16/apple-pay-gets-more-bank-support-but-it-still-needs-a-lot-more-stores-to-succeed/). Yet like most new technologies it takes time for others to upgrade to it, and in this case that means retailers need new software and terminal equipment that will accept the mobile payment platform. Although this takes time and money, every new technology does, and over time I believe it will save retailers money and time. Imagine a busy retailer two years from now who has no ability to take mobile payments during a busy holiday rush, they will have to staff more people, suffer more human error via cash transactions and manually entered credit card transactions, risk employee theft of unmasked credit card numbers, and customers will leave feed up with how long it takes to be serviced. Conversely, imagine a busy retailer two years from now who has the ability to take mobile payments, they will staff less people, customers can check themselves out and the risk of human error is reduced while security has the potential to be better. Moreover, in a hyper competitive retail market this can bring prices down and service levels up to the benefit of the customer, the community, and the technology sector. This is where innovation is born and some Subway franchise owners have taken the lead as of Nov. 2013 (http://www.cnbc.com/id/101211284). Economic policy makers must not hide from this better future and should take note from the private sector.

Fig. 5. Subway entrepreneur using Bitcoin:

It is likely less costly to make and secure digital currency than it is to make and secure cash and coins. Every time the U.S. Mint releases a new version of its bigger bills it takes years to develop, billions to make, billions to secure, they have to burn and shred billions of old bills, and a credible 2013 Market Watch Report backs this up by saying, “the new hundred dollar bill costs 60% more to make than the prior version” (http://www.marketwatch.com/story/new-100-bill-costs-60-more-to-produce-2013-10-08). With this type of growth rate how can these costs be sustainable especially as the population grows and paper resources become sparser?

Fig. 6.
New 100 Bill

Conversely, we know that technology costs go down or stay even when balanced for inflation over time. We also know that RAM memory, CPU speed, CPU size, fiber optic cable connectivity, and data encryption have made exponential leaps in the last five years thus making the environment for digital currency ripe. After all, many governments including the U.S. claim to have cloud, server, metadata, and predictive analytic technologies that manage to monitor and track all the internet transactions in most of the world, and the private sector would agree with this. If technology is this good why then can’t we have digital currency?

The answer is that change takes time and government bureaucrats have insulated themselves with yes lobbyists who support the current status quo. Supporting the current status quo is big business after all there are secured vehicle companies, printing companies, risk management companies, and many other companies that make money off the current financial regulatory system; lots of jobs and money are at risk if the current model would change. A good example of this is what happened to the film based camera company Kodak when it failed to respond to digital, but with digital currency its worse because we are dealing with big government and elected leaders who are at best imperfect though at times well intentioned. Yes there are some true leaders out there like Congressman Steve Stockman (R-TX 36th District) who took Bitcoin donations on his campaign and introduced the Virtual Currency Tax Reform Act (http://www.forbes.com/sites/perianneboring/2014/04/08/breaking-rep-stockman-to-introduce-first-bitcoin-bill/) to get the dialogue on Capitol Hill started but the bill has not yet passed and more work and research needs to be done. We as business/tech people need to be a loud part of this research and discussion and then more elected leaders will support it.

Lastly, digital currency moves the world closer to a one world currency where foreign exchange risk is significantly reduced or eliminated. Thus tariffs and geopolitical economic sanctions will be easier to see, prevent, and private sector companies that do a lot of international trade can benefit from that. Are there too many currencies throughout the world and would one global currency be better? Well it would be better in that there would be fewer economic highs and fewer economic lows but it would be worse in that highly valued companies and individuals would be greatly devalued in the developed world and some in the U.S. would argue that violates the free market principles of the constitution and discourages private sector competition. Moreover, a one world currency would be impracticable to support and would violate state sovereignty across the world yet that didn’t stop China from advocating for it in 2009 and subsequent years according to this credible source (http://usa.chinadaily.com.cn/world/2014-01/29/content_17264069.htm).

In sum, I don’t think a one world currency is the answer as I do think it would violate free market principles. Yet I do think a leading digital currency is needed when it can have transparent transfer rates, a secure audit trail, and can enable some cross-border economic development to balance out the third world so they don’t have to go to loan sharks for their crop loans. Cheers to our digital future!

If you want to hire me to speak at your next event or consult for your company on these and related topics concerning financial services risk, process improvement, project management, and related areas please contact me.