SVB’s Greg Becker Tells His Story

The failed bank was responding to incentives created by the Fed 

WSJ editorial.

"Federal regulators blame bad management and lax regulation for Silicon Valley Bank’s failure. On Tuesday former Silicon Valley Bank CEO Greg Becker gave the Senate his side of the story, filling in crucial details left out of the Federal Reserve’s self-examination last month.

By Fed Vice Chair for Supervision Michael Barr’s telling, SVB grew too big too fast. Executives prioritized growth over risk management while ignoring repeated warnings by examiners. Supervisors didn’t come down hard enough and were handicapped by a 2018 law that eased regulation on midsize banks.

Mr. Becker explains what the Fed would prefer to ignore. Deposits ballooned during the pandemic owing to “near-zero interest rates and the largest government-sponsored economic stimulus in history,” Mr. Becker told Senators. Liquidity and capital rules encouraged SVB to invest its flood of new deposits in long-dated government-backed securities that regulators deemed “safe.”

“Throughout 2020 until late 2021, the messaging from the Federal Reserve was that interest rates would remain low and that the inflation that was starting to bubble up would only be ‘transitory,’” Mr. Becker said. Then the Fed flipped on a dime and rapidly raised rates to subdue inflation in 2022, catching SVB and some other banks off guard. 

Around the same time, SVB found itself subject to new regulations for “Large Financial Institutions,” which consumed significant resources and attention. “I met regularly, and often monthly, with SVB’s regulators, including examiners, to discuss strategy, organizational changes, personnel changes, our initiatives, and address any regulatory issues or concerns,” Mr. Becker noted.

“From 2020 to 2022, our headcount and professional services expenses increased substantially, the bulk of which were dedicated to enhancing risk management and operational execution,” he added. “By the end of 2022, my recollection is that SVB had roughly 1,000 people with all, or the majority, of their responsibilities focused on risk management of some type.”

A lack of attention to regulation can hardly be faulted for SVB’s failure. Mr. Becker’s testimony suggests that bank examiners and SVB employees were focused more on complying with regulation than managing actual and potential balance-sheet risks. Examiners were concerned primarily with SVB’s processes, not its classic financial vulnerability of interest-rate risk hiding in plain sight.

Bank executives aren’t blameless, but they were also responding to the Fed’s easy money and misplaced regulatory priorities. Mr. Becker has lost his job and no doubt a lot of money. Has even a single regulator at the San Francisco Fed lost hers?"