Global: FDIC Lawsuit Against Former SVB Executives Signals Increased Focus on Risk Management Oversight

The new administration brings with it a phase of uncertainty surrounding banking regulations and the future of regulatory agencies. While rule-making and enforcement actions remain crucial, a surge in courtroom activity offers an alternative method for shaping corporate policy and internal operations—often providing insights for the broader industry.

A significant lawsuit filed last week by the Federal Deposit Insurance Corporation (FDIC) against 17 former executives of Silicon Valley Bank (SVB) underscores several critical issues under scrutiny by the agency.

The lawsuit names high-ranking individuals, including SVB’s former CEO, directors, chief risk officer, and CFO. Central to the FDIC’s allegations is “egregious mismanagement” of risk, particularly relating to interest rate and liquidity risks. This mismanagement ultimately led to SVB’s takeover and closure by a California state financial regulator in March 2023, following customer withdrawals and a dramatic decline in stock prices. This crisis was exacerbated by investor concerns about the bank’s liquidity, bringing the risk of a bank run into the modern digital age, amplified by social media and the growing influence of FinTech clients.

Legal Action Was Expected
The filing of the lawsuit had been anticipated. Last month, reports emerged that the FDIC’s board of directors had unanimously authorized potential legal action against the former executives. As detailed in the lawsuit, the FDIC asserts that SVB’s management mishandled the bank’s held-to-maturity securities portfolio by purchasing long-dated securities as interest rates were rising, resulting in an over-concentration of these assets. The FDIC also claims that SVB’s officers mismanaged the bank’s available-for-sale securities portfolio by removing critical interest rate hedges.

The lawsuit, filed in the U.S. District Court for the Northern District of California, highlights that SVB’s rapid growth far exceeded that of the broader industry, which grew by 24% between 2019 and 2022. The FDIC notes that by the end of 2022, more than half of SVB’s deposits were tied to venture-capital-backed companies, directly linking the bank’s deposit growth to the liquidity of venture-capital deals. Notably, 94% of SVB’s deposits were uninsured, as they exceeded the $250,000 threshold for FDIC protection.

Risk Oversight Lacked Amid Rapid Growth
According to the FDIC, these deposits were “inherently less stable,” and their concentration in specific sectors with highly volatile liquidity profiles made SVB particularly vulnerable to a sudden increase in interest rates or a loss of confidence in the bank. The FDIC also highlights that while the bank’s rapid expansion raised alarms, particularly regarding deposit concentration, SVB’s risk management systems failed to keep pace.

Regulators, including the Federal Reserve and state authorities, had raised concerns about SVB’s asset growth outpacing its risk management capabilities. Issues were identified with liquidity risk management, stress testing, and a lack of effective board oversight and formal frameworks to address these risks.

The FDIC further claims that rather than taking corrective action to resolve these issues, SVB’s executives altered the assumptions underlying one of the bank’s risk models—without legitimate justification—to make it appear as if the bank was in compliance with its own policies, thereby masking the severity of the risks it faced.