Dive Brief:

• The Federal Deposit Insurance Corp. is considering taking legal action against six former officers and 11 former directors of Silicon Valley Bank, the agency said Tuesday.
• FDIC Chairman Martin Gruenberg voiced support for the move in a statement Tuesday “because it seeks to hold these former officers and directors accountable for their breaches of duty.” In mismanaging SVB’s investment portfolios and exposing the bank to serious risk, executives caused the lender to incur billions of dollars in losses, and that led to an estimated $23 billion loss to the agency’s Deposit Insurance Fund, he said.
• The former bank officers and directors weren’t named in Gruenberg’s statement. The FDIC board voted unanimously Tuesday to pass the resolution, an agency spokesperson said.

Dive Insight:

The Santa Clara, California-based bank, founded in 1983, had an excessively large proportion of uninsured deposits and a concentrated customer base of venture capital-backed businesses.

As SVB experienced a bank run in March 2023, the lender had to sell long-dated securities at a steep loss, because rising interest rates had affected its portfolio. The bank was closed March 10, 2023 by the California Department of Financial Protection and Innovation, and the FDIC was appointed receiver. 

When an insured bank fails, the FDIC can investigate bank directors, officers and other employees whose behavior led to losses at banks that enter FDIC receivership, Gruenberg noted Tuesday. After investigating, as the agency did with SVB, the FDIC may pursue claims that have merit and are expected to be cost-effective, in an effort to hold management accountable.

At $212 billion-asset SVB, executives’ mismanagement of the lender’s held-to-maturity securities portfolio breached key internal risk metrics, Gruenberg said. The bank’s over-concentration of such assets “far exceeded” those of its peer banks, and the flawed strategy exposed SVB to significant interest rate risk. 

SVB’s available-for-sale securities portfolio was also mismanaged, as the executives at issue removed interest rate hedges as rates increased. “If this portfolio had continued to have been hedged properly, the Bank would have been protected against losses from rising interest rates,” Gruenberg said.

Another factor: The former directors and officers also held equivalent positions for the bank’s holding company and allowed “an imprudent payment” of a bank-to-parent dividend from SVB to the holding company as the lender went into a tailspin, the FDIC chair noted. 

That combination of errors led to billions of dollars in losses for SVB, which the FDIC, as receiver, has the duty to recover, Gruenberg said. “It is vital that Bank leadership be held accountable for their failures,” he said. 

Alexandra Steinberg Barrage, a partner at law firm Troutman Pepper and FDIC vet, said Gruenberg’s statement “is more detailed (and public) compared to others I’ve seen,” but isn’t surprising given that SVB’s unique failure prompted Capitol Hill hearings and executive compensation rule reprisals, in addition to posing significant costs to the DIF.

The FDIC filed dozens of lawsuits in the wake of 2007-09 failures and recovered about $4 billion, noted Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business School and Columbia Law School. 

The FDIC – as receiver – can hold bank officers and directors personally liable for civil monetary damages under federal law in cases of gross negligence, as well as lower standards under applicable state laws, Baker said. Lawsuits filed against SVB's directors and officers would likely be governed by California law, given the bank’s headquarters and business concentration.

“California's business judgment rule shields directors, but not officers, from liability for business decisions made in good faith without fraud, conflicts of interest or total abdication of responsibility” – essentially a gross negligence standard, Baker said in an email. “California law allows officers, including those at SVB, to be sued for simple negligence, a much lower standard.”