HBP# HK142

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PINGYANG GAO
XU LI
RAMÉE LIU

GOVERNANCE LESSONS IN SILICON VALLEY

BANK’S FAILURE

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The Silicon Valley Bank (SVB or the bank) of SVB Financial Group (SVBFG) (NASDAQ:
SIVB) was headquartered in Santa Clara, California. For around 40 years, it had provided
financing support to tech startups, health-care and life science companies, and venture capital
funds primarily in Silicon Valley.1 On 8 March 2023, the bank attempted to raise equity by
offering shares worth USD2.25bn and sell USD21bn worth of debt securities to improve
liquidity, but was unsuccessful [see Exhibit 1, timeline of major events].2 The next day, people
started to express doubts about the bank’s solvency, for example, on social media. This led its
depositors to withdraw cash, totaling around USD42bn, equivalent to a quarter of its total
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deposits. 3 On 10 March 2023, the bank run continued with depositors requesting a further
USD100bn in cash withdrawals. That day, US regulators shut down the bank and halted its
shares from trading on NASDAQ.45

The failure of SVB, with USD212bn of assets on 31 December 2022, was the second-largest
bank failure in US history.6 The event caused a ripple effect that shook the global banking
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market, highlighting underlying risks in the banking systems.7 Two days after the forced closure
of SVB, the US regulators also closed Signature Bank of New York, which had USD110.4bn
of assets.8

SVB had two primary types of debt securities investments, which were classified as “Available
for Sale” (AFS) securities and “Hold to Maturity” (HTM) debt investments, when recording its
assets. The bank included the unrealized gain or loss on AFS securities in “other comprehensive
No

1
“Silicon Valley Bank shut down by US banking regulators,” Financial Times, 11 March 2023,
https://www.ft.com/content/6943e05b-6b0d-4f67-9a35-9664fb456504, accessed 14 March 2023.
2
“Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023,
https://static.seekingalpha.com/uploads/sa_presentations/962/91962/original.pdf, accessed 14 March 2023.
3
“Silicon Valley Bank shut down by US banking regulators,” Financial Times.
4
“Silicon Valley Bank shut down by US banking regulators,” Financial Times.
5
Jennifer Schonberger, “Silicon Valley Bank CEO Greg Becker: 'I am truly sorry',” Yahoo finance, 16 May 2023,
https://finance.yahoo.com/news/silicon-valley-bank-ceo-greg-becker-i-am-truly-sorry-002152680.html, accessed 17 May 2023.
6
“Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023.
7
“Silicon Valley Bank shut down by US banking regulators,” Financial Times.
8
“Bank Crisis: Bank Rally Slows; Moody's Targets These Banks For Downgrades,” Investor’s Business Daily, 14 March 2023,
https://www.investors.com/news/bank-crisis-widens-as-signature-topples-funding-props-first-republic/?src=A00220, accessed
Do

15 March 2023.

Ramée Liu prepared this case under the supervision of Dr. Pingyang Gao and Dr. Xu Li for class discussion. This case is not
intended to show effective or ineffective handling of decision or business processes. The authors might have disguised certain
information to protect confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations,
people, places or fact mentioned in the case no longer occur, exist or apply.

© 2023 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 23/769C

Last edited: 2 August 2023

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

income” (OCI) of the comprehensive income statement, which did not affect its bottom line

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before the sale of assets.910 SVB’s unrealized loss on AFS securities was around USD2.5bn in
FY2022 [see Exhibit 2 for SVB consolidated statements of income].11

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In 2021, the bank invested heavily in long-dated securities, such as mortgage bonds securities
(MBS), and US treasury 10-year bonds, and claimed it would hold them until maturity, thus
classifying the majority of them as HTM securities.12 But longer-term bonds’ yield prices were
sensitive to interest rate changes, and the bank failed to hedge its exposure to rising interest
rates in 2022. SVB’s HTM securities were recorded at amortized cost, and changes in fair

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market value were only disclosed on its balance sheet [see Exhibit 3 for SVB consolidated
balance sheets]. Starting the first quarter of 2022, their fair value was below the amortized cost
at the end of every quarter, and by USD15.1bn on 31 December 2022.1314 SVB’s total equity,
which was close to the drop in value of the HTM securities, was at USD16.3bn [see Exhibit 1].

On 12 March 2023, US regulators attempted to stabilize the US banking industry. They

announced an emergency lending facility that guaranteed that SVB depositors would receive

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their deposited funds in full, even if it exceeded the USD250,000 insured limit per account
provided to banks insured by the Federal Deposit Insurance Corporation (FDIC).1516 Signature
Bank depositors could also recover all their funds while the Federal Reserve System (the Fed)
searched for buyers for these banks.1718

Advocates of the fair value method had been urging the Financial Accounting Standards Board
(FASB) in the US to record unrealized gain or loss on HTM securities for banks.1920 Some
banking industry executives, on the other hand, lobbied the FASB and the bank regulators to
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keep the rules as they were. According to the executives, if banks intended to keep securities to
maturity, changes in the market including interest rates would not affect their value. Recording
unrealized losses would force many US banks to immediately incur significant losses in
investment securities, requiring replenishment of capital reserves to comply with regulations.
What approach should the board of the FASB have taken that aligned with its mission “to
promote financial reporting that provided useful information to investors and others who used
financial reports,” and also balance the interests of the banking industry?21
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9
SVB, FY2022 Financial Statements, 10K Report, p. 94, https://ir.svb.com/financials/annual-reports-and-proxies/default.aspx,
No

accessed 2 April 2023.

10
Andrew Bloomenthal, “Other Comprehensive Income: What It Means, With Examples,” Investopedia.com, 17 May 2022,
https://www.investopedia.com/ask/answers/071415/what-are-some-examples-items-count-comprehensive-income.asp, accessed
8 April 2023.
11
SVB, FY2022 Financial Statements, 10K Report, p. 97.
12
“Silicon Valley Bank shut down by US banking regulators,” Financial Times.
13
SVB, FY2022 Financial Statements, 10K Report, p. 65 and p. 95.
14
“What’s wrong with the banks,” The Economist, 16 March 2023, https://www.economist.com/leaders/2023/03/16/whats-
wrong-with-the-banks, accessed 16 April 2023.
15
Alexandra Scaggs, “SVB depositors will get all their money (feat. SBNY shutdown),” Financial Times, 13 March 2023,
https://www.ft.com/content/72c25414-aabe-432a-a785-a8b2bd6887f9, accessed 11 April 2023.
16
The Federal Deposit Insurance Corporation (FDIC), The FDIC, About, https://www.fdic.gov/about/, accessed 6 May 2023.
17
Harrison Miller, “Bank Crisis: Bank Rally Slows; Moody's Targets These Banks For Downgrades,” Investors.com, 14 March
Do

2023, https://www.investors.com/news/bank-crisis-widens-as-signature-topples-funding-props-first-republic/?src=A00220,
accessed 2 April 2023.
18
The Federal Reserve System (Fed) was the central bank of the United States, The Fed, About the Fed,
https://www.federalreserve.gov/aboutthefed.htm, accessed 2 May 2023.
19 Financial Accounting Standards Board (FASB), FASB, About the FASB, https://www.fasb.org/facts, accessed 21 July 2023.
20
Stephen Foley, “Silicon Valley Bank losses embolden calls for US accounting rule reform,” Financial Times, 21 March 2023,
https://www.ft.com/content/10cfba27-a63c-4263-b958-61753b32f151, accessed 9 April 2023.
21 Financial Accounting Standards Board (FASB), FASB, About the FASB.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

About SVB

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SVB and SVBFG
In 1983, SVB was established as a state-chartered bank in Santa Clara, California [see Exhibit
1].22 In 1999, SVBFG was incorporated and began offering commercial and private banking
products and services through its principal subsidiary, SVB. 23 Its other subsidiaries and
divisions provided investment banking services and a range of non-banking products and
services, including funds management and M&A advisory services.24

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Specializing in financing technology, life science, and health-care industries, as well as
supporting global private equity and venture capital funds in Silicon Valley, SVB became a
regional bank that set the standard for supporting young companies through tough times. By
lending funds to unprofitable tech startups during their incubation period, which could last from
three to five years, SVB ventured where most other banks would not.25 In addition, since 1994,
the bank had loaned over USD4bn to the wine industry in California.26

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With the vision of becoming the largest US banking group in the “innovation economy,”
SVBFG experienced rapid expansion between 2020 and early 2023 through a series of
acquisitions, including its nearly USD1bn acquisition of a private bank, Boston Private, in
2021.2728

Changes in Ownership
SVBFG was owned by over 200 exchange-traded funds (ETFs). Vanguard, State Street Global
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Advisors, and BlackRock were the three largest shareholders, with a total holding of 21.6% on
31 December 2022.29 After SVB was forced to shut down, the FDIC funded the SVB depositors’
withdrawals using the fees paid to the FDIC’s Deposit Insurance Fund. But SVB’s shareholders
and certain unsecured debtholders’ interest were not protected.30

On 12 March 2023, the FDIC transferred all the assets of SVB to a newly formed Silicon Valley
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Bridge Bank to resume the bank’s daily operations.3132 Tim Mayopoulos, a former CEO and
executive at Fannie Mae, became the CEO of Silicon Valley Bridge Bank and was responsible
for seeking potential bidders.33 On 20 March 2023, HSBC announced the purchase of SVB’s

22
SVB, FY2022 Financial Statements, 10K Report, p. 6.
23
SVB, FY2022 Financial Statements, 10K Report, p. 6.
24
SVB, FY2022 Financial Statements, 10K Report, p. 6.
No

25
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times, 16
March 2023, https://www.ft.com/content/6e23a2fb-484e-418d-b309-bf558b3a6a17, accessed 9 April 2023.
26
Arabella Mileham, “Silicon Valley Bank wine boss ‘hopeful’ interested parties will buy wine division,” The Drinks Business,
20 March 2023, https://www.thedrinksbusiness.com/2023/03/silicon-valley-bank-wine-boss-hopeful-interested-parties-will-
buy-wine-division/, accessed 2 April 2023.
27
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
28
“SVB Financial Group Completes Acquisition of Boston Private,” SVB, News, 1 July 2021,
https://www.svb.com/news/company-news/svb-financial-group-completes-acquisition-of-boston-private2, accessed 6 May
2023.
29
Yaёl Bizouati-Kennedy, “Which Exchange-Traded Funds Have the Largest Stake in Silicon Valley Bank?” Nasdaq.com, 15
March 2023, https://www.nasdaq.com/articles/which-exchange-traded-funds-have-the-largest-stake-in-silicon-valley-bank,
accessed 7 May 2023.
30
Harrison Miller, “Bank Crisis: Bank Rally Slows; Moody's Targets These Banks For Downgrades,” Investors.com.
Do

31 “Silicon Valley Bridge Bank, N.A. in Operation – Details for Counterparties,” SVB, 14 March 2023,

https://www.svb.com/news/company-news/silicon-valley-bridge-bank-n.a.-in-operation-details-for-counterparties, accessed 23
July 2023.
32
FDIC is an independent agency created by the US Congress to insure deposits; examine and supervise financial institutions for
safety, soundness, and consumer protection; make large and complex financial institutions resolvable; and manage
receiverships, FDIC, About, https://www.fdic.gov/about/, accessed 2 May 2023.
33
Natasha Mascarenhas and Alyssa Stringer, “Silicon Valley Bank: Here’s a timeline of the bank’s failure,” Techcrunch.com, 16
March 2023, https://techcrunch.com/2023/03/16/svb-crash-timeline-what-happened/, accessed 4 May 2023.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

UK arm at GBP1.34 Some of SVB’s former business overseas were taken over by local financial

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institutions, but as a regional bank, its overseas operations were minimal.

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First Citizens BancShares (NASDAQ: FCNCA) based in North Carolina, US, that owned First
Citizens Bank, agreed on 26 March 2023 to assume all the existing deposits and loans from
Silicon Valley Bridge Bank.35 First Citizens BancShares purchased around USD72bn of Silicon
Valley Bridge Bank’s assets at a discount of USD16.5bn.36 Depositors of the bridge bank would
automatically become depositors of First Citizens Bank, and former SVB branches were
renamed First Citizens Bank. In addition, the bridge bank’s debt securities and other assets

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worth around USD90bn remained in the receivership of the FDIC to be disposed of directly.37
The FDIC estimated the cost of SVB’s failure to its Deposit Insurance Fund to be
approximately USD20bn.38

The Management Team

On 8 March 2023, Greg Becker, who had served SVB for 29 years, was the president and CEO
leading the SVB management team [see Exhibit 5, SVB management on 8 March 2023].

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Despite being among the top 20 US banks, SVB’s management team continued to operate
entirely remotely across different time zones following the COVID-19 pandemic. This
approach deviated from its Wall Street counterparts and was more akin to a Silicon Valley
startup.39 While the bank was expanding and attempting to increase its competitive advantage
by pushing into new lines of business, such as underwriting tech listings, the management
team’s remote work created problems, according to an SVB executive interviewed by the
Financial Times.40
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In April 2022, the employment of SVB’s former Chief Risk Officer, Laura Izurieta, was
suspended, and she left the bank in October 2022.41 Kim Olson replaced her at the end of 2022,
although the bank did not disclose this change until March 2023.42 43

During SVB’s rapid expansion between 2020 and 2023, the company hired bankers from other
finance institutions using lucrative compensation packages. 44 By early 2023, the bank had
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around 8,500 employees. 45 In FY2022, the bank’s total compensation and benefits were
USD2.3bn [see Exhibit 2]. In the same year, Becker’s total compensation was around
USD9.9mn, with USD8.8mn dependent on the bank’s performance.46 With the management’s
compensation package heavily reliant on the bank’s short-term profits, it also affected its
decisions in investment. In FY2022, if the bank had invested in 1-year instead of 10-year

34
Arabella Mileham, “Silicon Valley Bank wine boss ‘hopeful’ interested parties will buy wine division,” The Drinks Business.
35
No

“First–Citizens Bank & Trust Company, Raleigh, NC, to Assume All Deposits and Loans of Silicon Valley Bridge Bank, N.A.,
From the FDIC,” The FDIC, News, 26 March 2023, https://www.fdic.gov/news/press-releases/2023/pr23023.html, accessed
21 May 2023.
36
“First–Citizens Bank & Trust Company, Raleigh, NC, to Assume All Deposits and Loans of Silicon Valley Bridge Bank, N.A.,
From the FDIC,” The FDIC, News.
37
“First–Citizens Bank & Trust Company, Raleigh, NC, to Assume All Deposits and Loans of Silicon Valley Bridge Bank, N.A.,
From the FDIC,” The FDIC, News.
38
“First–Citizens Bank & Trust Company, Raleigh, NC, to Assume All Deposits and Loans of Silicon Valley Bridge Bank, N.A.,
From the FDIC,” The FDIC, News.
39
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
40
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
41
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn, 27 March 2023, http://m.eeo.com.cn/2023/0327/583487.shtml,
Do

accessed 5 April 2023.

42
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn.
43
“Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023.
44
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
45
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
46
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

treasury bonds, it would have offered a 1.2% lower interest margin, and the bank’s income

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would have decreased by 80%, affecting the management’s compensation.47

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Governance of SVB’s Management
Based on interviews with current and former SVB personnel, the Financial Times reported that
the bank prioritized innovation and growth over risk management in certain instances, as
concerns were raised about the bank’s management decisions following its collapse. According
to one former banker, “If you’re a banker at a traditional bank, your credit analysis is very

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quantitatively rigorous and there has to be clear analysis of how you get paid back.”48 SVB’s
management reportedly prioritized social issues and relied heavily on consultants to develop
new strategies, rather than focusing on risk mitigation associated with interest rates.49 Another
former executive described SVB as a West Coast bank that operated at the heart of innovation,
emphasizing the importance of relationships and empathy over a cut-throat approach like that
of Goldman Sachs.50

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Sale of Shares by the Management
In late January 2023, Becker entered a contract to sell part of his shares in SVB and eventually
sold around USD3.6mn worth of shares on 27 February 2023. 51 Approximately two weeks
before the bank’s collapse, CFO Daniel Beck and Chief Marketing and Strategy Officer
Michelle Draper also sold some of their shares.52 These actions raised further concerns about
the bank’s management decisions, prompting the FDIC to launch a probe into SVB’s
management after its collapse.
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Share Price and Market Capitalization
In 1987, SVB’s shares were listed on NASDAQ as SIVB.53 During their peak on 22 October
2021, the shares were valued at USD753.12 and market capitalization was around USD39.8bn
[see Exhibit 4, SVB Share Price Movement].5455 However, in 2022, SVB’s debt securities
experienced unrealized losses, leading to a decline in the value of its shares. On 9 March 2023,
the last trading date for SVB’s shares, investors were doubtful about the bank’s liquidity,
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resulting in a 60.1% drop in the share price to a closing price of USD106.4.56 At that price, the
bank’s P/E ratio was 4.18, and its market capitalization was around USD6.28bn.57
No

47
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn.
48
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times, 24 April 2023,
https://www.ft.com/content/1795b4a7-65b0-4053-a328-3c46c525ad71, accessed 4 May 2023.
49
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
50
Tabby Kinder and Antoine Gara, “It is not cut-throat like Goldman Sachs’: SVB’s culture in focus,” Financial Times.
51
“SVB news | Top bosses sold $4.5 million worth of shares before the collapse,” CNBCTV18, 13 March 2023,
https://www.cnbctv18.com/market/silicon-valley-bank-top-bosses-sold-45-million-worth-of-shares-before-the-collapse-
16143781.htm, 7 May 2023.
Do

52
“SVB news | Top bosses sold $4.5 million worth of shares before the collapse,” CNBCTV18.
53
SVB Share quote, Google Finance, https://www.google.com/finance/quote/SIVBQ:OTCMKTS?hl=en&window=5Y, accessed
3 June 2023.
54
SVB Share quote, Google Finance.
55
SVB market capitalization, Trading Economics, https://tradingeconomics.com/sivb:us:market-capitalization, accessed 3 June
2023.
56 SVB Share quote, Google Finance.
57
SVB Share quote, Google Finance.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Accounting of Debt Securities

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Classification of AFS and HTM Securities
The FASB had set the Accounting Standard Code, ASC 320, for debt securities.58 An entity had
to classify a debt security at acquisition based on its intention [see the description of ASC 320-
10-25 in Exhibit 6 on the classification of debt securities].59 If there was uncertainty regarding
whether to sell the debt securities before maturity or hold onto them subject to changes in
market interest rates and other factors, the securities had to be classified as AFS rather than

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HTM. Furthermore, the classification of a security as an HTM security had to be reviewed at
each reporting period. In SVB’s 10K filing, the bank indicated that its securities were purchased
with “the positive intent and ability to hold them to maturity,” resulting in their classification
as HTM securities.60

SVB’s Accounting of Debt Securities

Income Recognition

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SVB’s income statement reported interest income from loans and debt securities, which were
referred to as “investment securities” in SVB’s financial reporting [see Exhibit 2 and Table 1
for a summary of SVB’s accounting for debt securities]. Additionally, after the sale of AFS
securities and “non-marketable and other equity securities,” the “gains (losses) on debt
securities” were recognized in the income statement.61 In cases where the bank decided to sell
HTM securities, they were first transferred to AFS securities. Once the sale was executed, the
bank recognized the “gains (losses) on debt securities,” the same as other AFS securities.
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AFS Securities
At the end of each accounting period, SVB measured the fair value of AFS securities. The
difference in the “unrealized gain or loss on AFS securities” was recorded as an item of OCI in
the comprehensive income statement [see Exhibit 7 for SVB consolidated statements of
comprehensive income and Table 1].6263 The amount of OCI each year was rolled into the
“accumulated other comprehensive income or loss” of the equity section of its balance sheet
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[see Exhibit 3]. The changes in “unrealized gain or loss on AFS securities” did not affect the
bank’s income but impacted its OCI and total equity, and in calculating the bank’s capital
requirement [see Exhibit 8 for Regulatory Tests of US Banks].

HTM Securities
Debt securities classified as HTM were accounted for at amortized cost, with no adjustments
for changes in fair value [see Table 1].64 This accounting method was also commonly used by
other countries, including European banks. SVB amortized the premiums or discounts of the
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securities over the life of the assets to calculate the amortized cost. Any changes in fair value
of HTM securities were included on their balance sheets as a disclosure only and did not impact
the bank’s income, OCI, or equity [see Exhibit 3].

58
“Classification of debt securities,” US PwC Loans & investments guide 3.3, 31 May 2022,
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https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loans_and_investment/loans_and_investment_US/chapter_3_acco
unting__1_US/33_classification_of_US.html, accessed 7 May 2023.
59
“Classification of debt securities,” US PwC Loans & investments guide 3.3, 31 May 2022.
60
SVB, FY2022 Financial Statements, 10K Report, p. 101.
61
SVB, FY2022 Financial Statements, 10K Report, pp. 65 and 101.
62
SVB, FY2022 Financial Statements, 10K Report, pp. 94 and 95.
63
Andrew Bloomenthal, “Other Comprehensive Income: What It Means, With Examples,” Investopedia.com.
64
SVB, FY2022 Financial Statements, 10K Report, pp. 65 and 101.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Table 1: Summary of SVB’s Accounting in Debt Securities

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AFS Securities HTM Securities
Interest income from Recognized as interest income Recognized as interest income
debt securities in income statement. in income statement.
(i) First transferred from HTM
to AFS securities.

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At sale of debt Recognized as “gains (losses)
(ii) Recognized as “gains
securities on debt securities” in income
(losses) on debt
statement.
securities” in income
statement when sold.

Value at period end Recorded at fair market value Recorded at amortized cost on
on balance sheet. balance sheet.

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Recorded as “unrealized gain
or loss on securities” in OCI
Difference in fair statement and included in
market value and cost Disclosure on balance sheet
“accumulated other
at period end only.
comprehensive income or loss”
in the equity section on the
balance sheet.
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Source: Prepared by coauthor of this case.

Accounting Formulas for AFS Securities

(i) Interest income from debt securities.

The interest income earned from debt securities was recorded at period end using the same
accounting method for both AFS and HTM securities.
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The accounting formula on the interest income of USD100mn from debt securities:

Interest Other Other Shareholder’s

+ = Liabilities + Profit +
Receivable Assets Equity
100mn 0 = 0 100mn 0
No

(ii) To record unrealized gain or loss on AFS securities.

At period end, the AFS securities were measured at their fair market value and any unrealized
gains or losses were recognized in the OCI statement.

The accounting formula to record unrealized losses on AFS securities at USDD500mn at

period end:

AFS Other Unrealized Gains Other Shareholder’s

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+ = Liabilities + +
Securities Assets (losses) (in OCI) Equity
(500mn) 0 = 0 (500mn) 0

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Accounting Formulas for HTM Securities

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(i) Before the sale of HTM securities, they were first reclassified as AFS securities.

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The accounting formula for the reclassification of HTM to AFS securities at USD400mn:

HTM AFS Shareholder’s

+ + Other Assets = Liabilities +
Securities Securities Equity
(400mn) 400mn 0 = 0 0

rP
(ii) Following the reclassification of the securities from HTM to AFS, the sale of AFS securities
was recorded, and any gains or losses were recognized in the income statement.

The accounting formula to sell AFS securities at a price of USD350mn, the cost was
USD400mn, and realize a loss of USD50mn:

Gains or

yo
Bank Other
AFS Other (Losses) on
Balances + + = Liabilities + + Shareholder’s
Securities Assets Debt
and Cash Equity
Securities
350mn (400mn) 0 = 0 (50mn) 0

SVB’s Financial Highlight

op
Ordinary Income
As market interest rates began to rise in March 2022, SVB experienced an increase in its total
interest income in FY2022, along with a corresponding increase in interest expenses [see
Exhibit 2]. This resulted in a 33% year-on-year increase in “net interest income after provision
for credit losses” at USD4.1bn on 31 December 2022 [see Exhibit 2]. But SVB’s non-interest
income from the sale of AFS securities and “non-marketable and other equity securities” saw a
tC

decline in FY2022, with “losses on investment securities, net” amounting to USD285mn,

compared to USD761mn in gains in FY2021. As a result, SVB’s “net income available
to common stockholders” in FY2022 dropped by 14.7% year-on-year, amounting to USD 1.5bn.

Comprehensive Income
In FY2022, SVB reported “unrealized holding losses” of USD 2.5bn on AFS securities under
the “change in unrealized gains and losses on AFS securities” section of its comprehensive
income statement, compared to USD 644mn loss year-on-year [see Exhibit 7]. 65
No

Debt Securities
In FY2021, SVB received additional deposits of around USD 87.2bn mainly from tech
companies and venture capital funds after they had successfully raised funds, owing to the
booming tech share prices [see Exhibit 3]. That same year, SVB made a higher-than-average
bet on long-dated securities in MBS and US 10-year bonds, increasing HTM securities by
USD81.6bn to USD98.2bn on 31 December 2021. On 31 December 2022, AFS securities
amounted to USD26.1bn, while HTM securities stood at USD91.3bn, which was a much lower
Do

ratio of AFS to HTM securities compared to other US banks.66 As SVB’s senior management’s
compensation relied on short-term profit as a bonus, it provided incentives to classify a higher

65
SVB, FY2022 Financial Statements, 10K Report, p. 94.
66
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

proportion to HTM securities when the value of the debt securities was declining, as it would

t
not negatively affect the bank’s profit or capital requirement.

os
SVB disclosed in its FY2021 annual report that it would incur a loss of USD5.7bn if interest
rates rose by 2%.67 Its risk management policy did not take into account the sudden rate hike
by the Fed in 2022 to 4.25% [see Figure 1 on the increase of the US federal funds rate].68
Similarly, after more than a decade of low interest rates, most US banks lacked sufficient
experience in managing the risks resulting from the sudden interest rate changes.69 Like SVB,
most other US banks failed to effectively hedge for a significant increase in interest rates.

rP
However, other banks’ risk exposure was less than SVB, as most of their proportion of long-
term debt securities was relatively lower.

Figure 1: US Federal Funds Rate from 1 March 2022 to 5 May 2023

yo
op
Note: The US federal funds rate was 0.25% on 1 March 2022 and 4.5% on 31 December 2022.
Source: US Federal Funds Rate, Trading Economics, https://tradingeconomics.com/united-
tC

states/interest-rate, accessed 5 May 2023.

SVB’s FY2022 quarterly earnings reports disclosed an unrealized loss on HTM securities of
USD7.0bn, USD11.2bn, and USD15.9bn at the end of the first, second, and third quarters,
respectively.70 At the end of the third quarter, if SVB’s total equity of USD15.8bn was reduced
by the unrealized loss on HTM securities of USD15.9bn, it would have wiped out the total
equity.71
No

On 31 December 2022, SVB’s HTM securities, stated at “amortized cost and net of allowance
for credit losses,” was USD91.3bn [see Exhibit 3]. 72 However, the fair value disclosed had
fallen to USD76bn, resulting in a drop of USD15.1bn in value. The loss disclosed on 31
December 2021 was only around USD968mn. On 31 December 2022, SVB’s total equity was
USD16.3bn, compared to the HTM securities’ drop in value at USD15.1bn, posing another
warning sign to investors.73

67
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn..
Do

68
Tabby Kinder and Antoine Gara, “‘It is not cut-throat like Goldman Sachs’: SVB’s culture in focus after collapse,” Financial
Times.
69 US Federal Funds Rate, Trading Economics, https://tradingeconomics.com/united-states/interest-rate, accessed 28 June 2023.
70
SVB, Quarterly Earnings, https://ir.svb.com/financials/quarterly-results/default.aspx, accessed 1 May 2023.
71
Sanjay Bissessur and Jan Bouwens, “Letter: SVB collapse was apparent if you read the footnotes,” Financial Times, 24 April
2023, https://www.ft.com/content/002b2aac-b7d1-425a-9b64-ffb01135418e, accessed 4 May 2023.
72
“Silicon Valley Bank shut down by US banking regulators,” Financial Times.
73
SVB, FY2022 Financial Statements, 10K Report, p. 95.

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Loans to Clients and Deposits Received

t
On 31 December 2022, SVB’s net loans to clients were USD73.6bn [see Exhibit 3]. According

os
to SVB’s Mid-Quarter Update on 8 March 2023, the bank’s loans to clients in FY2021 and
FY2022 had the lowest nonperforming loan ratios in the past decade. 74 In addition, on 31
December 2022, the bank’s “allowance for credit losses: loans” over the loan balance was well
below 1% [see Exhibit 3].

In 2022, the NASDAQ composite index experienced a significant drop of 33.89%, and the

rP
value of most US tech companies fell. 75 As a result, venture capital investing slowed
dramatically, and SVB’s deposits received fell by USD16.1bn in 2022 to USD173.1bn on 31
December 2022 [see Exhibit 3]. On 31 December 2022, SVB had a cash and cash equivalent
balance of USD 13.8bn, compared to a deposit received balance of USD173.1bn [see Exhibit
9, SVB Consolidated Statements of Cash Flows].

Liquidity at Risk

yo
A mismatch existed between SVB’s long-term investments, which were funded using liquid
bank deposits, thus creating liquidity risks for the bank. Starting in the second quarter of 2022,
different parties such as the banking regulators, the consultants that SVB hired from BlackRock,
and other financial analysts had been aware of this liquidity risk, but were unable to lead the
bank’s management to a safer path.76 In October 2022, S&P Global Ratings (S&P) had also
noted “very large” balances of deposits that were well above the FDIC insured limit of
USD250,000.77 SVB’s clients were mainly corporates and venture capital funds with balances
above this insured limit. If they suspected there was a risk of insolvency for SVB, they would
op
be quick to withdraw their money.78 If the risk of withdrawing deposits materialized, S&P
viewed SVB as unlikely to sell securities for liquidity, given that rising market interest rates had
already contributed to a large unrealized loss.79

In November 2022, Becker reiterated that SVB did not intend to sell its HTM securities, and
analysts at J.P. Morgan reaffirmed their overweight share price target at USD375, arguing
tC

that deposit outflows appeared quite manageable [see Exhibit 4]. 80 On 14 February 2023,
Forbes ranked SVB as one of America’s best banks for the fifth consecutive year.8182 In early
March 2023, although S&P and Moody’s were critical about SVB’s liquidity risk and warned
of downgrading its bank ratings, they did not take action before 8 March 2023.8384

Mitigating Risks in the US Banking Industry

No

Following the collapse of SVB, regulators, financial analysts, journalists, and

academics evaluated the causes of the bank’s failure. Also, they examined the prevailing
regulatory compliance and provided recommendations to reduce risks in the banking industry.

74
“Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023, p. 25.
75
Nasdaq Composite Index, Google Finance.
76
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
77
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
78
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
79
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
80
Christiaan Hetzner, “SVB collapse highlights $620 billion hole lurking in banks’ balance sheets,” Fortune, 11 March 2023,
Do

https://finance.yahoo.com/news/svb-collapse-highlights-620-billion-172512701.html, accessed 24 April 2023.

81
Andrea Murphy and Hank Tucker, “America’s Best Banks,” Forbes, 14 February 2023,
https://www.forbes.com/lists/americas-best-banks/?sh=5ae54a20c0de, accessed 6 May 2023.
82
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn, 27 March 2023,
https://m.eeo.com.cn/2023/0327/583487.shtml, accessed 6 May 2023.
83
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
84 “Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023, p. 14.

10

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Regulatory Measures of Banks

t
The BASEL III framework comprised a set of international banking regulations for global

os
banks and was adapted by SVB.85 These regulations aimed to improve the banking system’s
ability to deal with financial stress, improve risk management, and promote transparency. They
involved the documentation of banks’ capital levels, the administration of stress tests for
various crisis scenarios, and liquidity tests to measure banks’ financial strength [see Exhibit 8].

The Capital Adequacy Ratio (CAR)

rP
CAR was commonly used to compare a bank’s capital and assets. The total capital ratio was
CAR = (Tier 1 + Tier 2 capital) / “risk-weighted assets” [see Exhibit 8 for the components of
CAR].86 The Tier-1 capital ratio was CAR = Tier 1 capital / “risk weighted assets.”87 The capital
requirement aimed to ensure that banks had enough cushion to absorb a reasonable amount of
losses before becoming insolvent and consequently losing depositors’ funds.

Under Basel III, the minimum CAR for Tier 1 capital was 8.5%, and total capital was 10.5%.88

yo
On 31 December 2022, SVB’s capital ratios were well above the minimum levels and reached
15.4% and 16.18%, respectively, which was higher than the average of their peers.89 Its large
investment proportion in low-risk MBS and US treasury bonds was classified as Tier 1 capital,
and did not negatively affect the bank’s capital ratios.90

Using CAR by itself did not account for the risk of liquidity and what would happen in a bank
run or financial crisis. Even though SVB had passed the stress tests and liquidity tests imposed
by the Fed, a bank run could also result if depositors lost confidence in a bank [see Exhibit
op
8].91 In April 2023, the Fed initiated negotiations with the banking industry to reform banks by
strengthening tests and liquidity requirements, particularly liquidity tests that were relaxed after
the 2008 banking crisis for small and mid-sized banks with assets under USD250bn, whereas,
in Europe, the liquidity rules from small to big banks were uniform.9293

Credit Default Swap (CDS)

tC

CDS was a financial contract that allowed banks and investors to transfer credit risk to another
party in exchange for periodic payments.94 Banks often used CDS to hedge risks associated
with their investments and loans, which could help them manage their risk exposure. In the case
of SVB, it did not use CDS to hedge the interest rate hike in 2022.

Investors could also use CDS as an indicator to identify risks in banks, as higher CDS spreads
applicable to a particular bank indicated greater risk of default or credit events. The
Economist advised that all global regulators should build a rule that recognized risks from
No

interest rates to reduce the risks in the banking industry.95

85
Andrew Bloomenthal, “Basel III: What It Is, Capital Requirements, and Implementation,” Investopedia.com, 17 July 2022,
https://www.investopedia.com/terms/b/basell-iii.asp, accessed 4 June 2023.
86
Adam Hayes, “What the Capital Adequacy Ratio (CAR) Measures, With Formula,” Investopedia.com, 17 April 2023,
https://www.investopedia.com/terms/c/capitaladequacyratio.asp, accessed 22 May 2022.
87
Adam Hayes, “Tier 1 Capital Ratio: Definition and Formula for Calculation,” Investopedia.com, 20 November 2020,
https://www.investopedia.com/terms/t/tier-1-capital-ratio.asp, accessed 4 June 2023.
88
“Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023, p. 14.
89
“Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023, p. 14.
90
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Do

Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn, p.4.

91
高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn.
92
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
93
“What’s wrong with the banks,” The Economist.
94
Adam Hayes, “What Is a Credit Default Swap (CDS), and How Does It Work?” Investopedia.com, 15 March 2023,
https://www.investopedia.com/terms/c/creditdefaultswap.asp, accessed 6 April 2023.
95
“What’s wrong with the banks,” The Economist.

11

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

The US Banks’ Unrealized Loss on Debt Securities

t
In 2022, the unrealized loss on AFS securities among US banks had been growing rapidly under

os
the Fed’s aggressive rate hikes.96 The FDIC reported that across the US banking system, the
amount of unrealized losses on AFS and HTM securities was massive in each quarter, totaling
around USD620bn on 31 December 2022 [see Figure 2].97 The total unrealized losses were
equivalent to about a third of the combined equity counted as capital requirement for the US
banks.98

rP
Figure 2: Unrealized Gains (Losses) on Investment Securities

yo
op
tC

Source: “Remarks by FDIC Chairman Martin Gruenberg on the Fourth Quarter 2022 Quarterly
Banking Profile,” The FDIC, 28 February 2023,
https://www.fdic.gov/news/speeches/2023/spfeb2823.html, accessed 2 May 2023.

Other banks in the US were much further away from the edge than SVB, but rising interest rates
had left the system vulnerable.99 On 28 February 2023, the FDIC stated, “[T]he combination of
a high level of longer-term asset maturities and a moderate decline in total
No

deposits underscore[s] the risk that these unrealized losses could become actual losses should
banks need to sell securities to meet liquidity needs.”100

Recognizing Fair Value versus Disclosures

In 2022, SVB’s disclosure of losses on HTM securities was exposed but not recorded in the
financial statements, which was a long-standing issue in accounting. The small investors who
did not fully comprehend a bank’s quarterly or annual report and relevant banking
regulations did not realize the disclosure’s impact on SVB’s liquidity. This highlighted the
Do

96
“US Banks Sitting on Billions of Losses,” Bloomberg TV, 14 March 2023.
97
“What’s wrong with the banks,” The Economist.
98
“US Banks Sitting on Billions of Losses,” Bloomberg TV, 14 March 2023.
99
“What’s wrong with the banks,” The Economist.
100
“Remarks by FDIC Chairman Martin Gruenberg on the Fourth Quarter 2022 Quarterly Banking Profile,” The Federal Deposit
Insurance Corporation (FDIC), 28 February 2023, https://www.fdic.gov/news/speeches/2023/spfeb2823.html, accessed 2 May
2023.

12

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

importance of disclosures in financial statements, which often did not receive sufficient

t
attention.101

os
Fair value advocates proposed using fair value in reporting to provide a more accurate reflection
of the market value of securities, helpful for investors and regulators. In addition, it would force
the bank and the regulators to take stronger actions before the bank reached a stress point or
liquidity issue.

In 2010, the FASB proposed expanding the use of fair value on corporate balance sheets, but

rP
the proposal was rejected by different parties, such as the banking industry that was recovering
from the 2008 financial crisis, and Federal Reserve chair Ben Bernanke, among other
regulators. 102 In the same year, the CFA Institute, a professional body for investors, also
campaigned for fair value rules.103 In the third week of March 2023, the CFA Institute sent a
new white paper to FASB urging it to eliminate the accounting treatment in HTM securities to
improve transparency. 104 The FASB replied that it was “always open to engage with
stakeholders on any issues.”105

yo
However, measuring some assets at fair value while others were not, and not attempting to use
fair value for liabilities on the balance sheet, could create confusion. In addition, fair value
could be volatile and subject to market fluctuations, creating accounting challenges and
increasing volatility in financial statements, especially during financial crises. If fair value was
used for HTM securities, the US banks’ presentation of financial results would differ from those
in European banks as well.
op
The Way Forward

In late March 2023, following the collapse of SVB and Signature Bank, the Swiss government
forced Credit Suisse to be acquired by its competitor, UBS. The US and Swiss governments
took swift action to contain a global financial crisis, but at a cost to society.106 In recalling SVB’s
collapse, Jerome Powell, Chairman of the Board of Governors of the Fed, asked, “How did this
tC

happen?” 107 Meanwhile, Michael Barr, the Fed’s Vice Chairman in charge of banking
supervision since July 2022, called SVB’s collapse a “textbook case of mismanagement.”108
What was the primary cause of SVB’s bank run and failure, without any sudden occurrence or
unforeseeable emergency? Was it the bank’s corporate governance and risk management, the
Fed’s interest rate hike, delayed responses from banking regulators, or social media’s influence
and rumors spreading about the bank’s impending insolvency? What were the
recommendations or suggestions for US bank regulators to reduce risk exposures and improve
No

corporate governance in the US banking industry? What were the suggestions to improve
accounting standards for recording HTM securities to protect the interests of different
stakeholders?

101 高平阳 Pingyang Gao, “金融危机和 2022 年诺奖——解读硅谷银行倒闭 (Financial Crisis and 2022 Nobel Prize -
Interpreting the Collapse of Silicon Valley Bank,” eeo.com.cn.
102
Stephen Foley, “Silicon Valley Bank losses embolden calls for US accounting rule reform,” Financial Times.
Do

103
Stephen Foley, “Silicon Valley Bank losses embolden calls for US accounting rule reform,” Financial Times.
104 Stephen Foley, “Silicon Valley Bank losses embolden calls for US accounting rule reform,” Financial Times.
105
Stephen Foley, “Silicon Valley Bank losses embolden calls for US accounting rule reform,” Financial Times.
106
Elliot Smith, “The Swiss claim the U.S. banking crisis ultimately toppled Credit Suisse. But are they right?”
CNBC, 24 March 2023, https://www.cnbc.com/2023/03/24/swiss-claim-the-us-banking-crisis-ultimately-toppled-credit-
suisse.html, accessed 23 July 2023.
107
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.
108
Mark Vandevelde and others, “Silicon Valley Bank: the multiple warnings that were missed,” Financial Times.

13

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 1: TIMELINE OF MAJOR EVENTS

t
Time Description of Events

os
1983 SVB was established in Santa Clara, California.
1999 SVBFG was incorporated, and SVB was its principal subsidiary.
1987 SVB was listed on NASDAQ as SIVB.

rP
2021 SVBFB spent nearly USD1bn to acquire a private bank, Boston Private.
During the year, SVB received a large inflow of deposits from tech firms
and venture capital funds and added around USD81.6bn in HTM
securities.
22 October 2021 During their peak, SVB’s shares reached USD753.12.
End of March The Fed started interest rate hikes, a total increment of 4.25% in 2022.

yo
2022
April 2022 SVB suspended the employment of former Chief Risk Officer Laura
Izurieta, and she left the bank in October 2022.
November 2022 FY2022 third quarter results reported SVB’s unrealized loss on HTM
securities was USD15.9bn.
op
February 2023 FY2022 year-end results reported SVB’s unrealized loss on HTM
securities was USD15.1bn.
8 March 2023 SVB attempted to sell USD21bn worth of AFS securities at a loss, in
addition to raising USD2.25bn worth in shares to improve liquidity, but
it could not find any buyer or investor.
Rumors and concerns about SVB’s insolvency problems were spreading
tC

on social media.
Customers withdrew around USD42bn of deposits.
9 March 2023 Customers attempted to withdraw another USD100bn of deposits.
On this last day of SVB’s share trading, share price fell by 60.1% and
closed at USD106.4; its market capitalization was USD6.28bn.
No

10 March 2023 The US banking regulators closed down SVB and halted its shares from
trading on NASDAQ.
12 March 2023 The Fed, the FDIC, and the Department of the Treasury announced an
emergency lending facility that guaranteed SVB depositors would
receive their deposited funds in full, even if it exceeded USD250,000, the
insured limit by the FDIC.
The FDIC transferred the assets of SVB to a bridge bank; Tim
Mayopoulos was appointed the CEO of Silicon Valley Bridge Bank.
Do

The US regulators also closed Signature Bank of New York with

USD110.4bn of assets.
20 March 2023 HSBC announced the purchase of SVB’s UK arm at GBP1.

14

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

26 March 2023 First Citizens BancShares purchased around USD72bn of Silicon Valley

t
Bridge Bank’s assets at a discount of USD16.5bn.

os
The bridge bank’s debt securities and other assets worth around
USD90bn remained in the receivership of FDIC to be disposed of
directly.

The FDIC estimated the cost of the failure of SVB to its Deposit

rP
Insurance Fund was approximately USD20bn.
28 March 2023 The FDIC announced a probe into SVB’s management.

yo
op
tC
No
Do

15

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 2: SVB CONSOLIDATED STATEMENTS OF INCOME

t
os
31 31 31
December December December
2022 2021 2020
(USD in millions)
Interest income:
Loans 3,208 1,966 1,520

rP
Investment securities:
Taxable 2,113 1,199 635
Non-taxable 140 106 61
Federal funds sold, securities purchased under
agreements to resell and other short-term
investment securities 212 18 26
Total interest income 5,673 3,289 2,242

yo
Interest expense:
Deposits 862 62 60
Borrowings 326 48 25
Total interest expense 1,188 110 85
Net interest income 4,485 3,179 2,157
Provision for credit losses 420 123 220
op
Net interest income after provision for credit losses 4,065 3,056 1,937

Noninterest income:
Gains (losses) on investment securities, net (285) 761 421
Gains on equity warrant assets, net 148 560 237
tC

Client investment fees 386 75 132

Wealth management and trust fees 83 44 -
Foreign exchange fees 285 262 179
Credit card fees 150 131 98
Deposit service charges 126 112 90
Lending related fees 94 76 57
Letters of credit and standby letters of credit fees 57 51 47
No

Investment banking revenue 420 459 414

Commissions 98 79 67
Other 166 128 98
Total noninterest income 1,728 2,738 1,840

Noninterest expense:
Compensation and benefits 2,293 2,015 1,318
Professional services 480 392 247
Premises and equipment 269 178 127
Do

Net occupancy 101 83 101

Business development and travel 85 24 24
FDIC and state assessments 75 48 28
Merger-related charges 50 129 -

16

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Other 268 201 190

t
Total noninterest expense 3,621 3,070 2,035

os
Income before income tax expense 2,172 2,724 1,742
Income tax expense 563 651 448
Net income before noncontrolling interests and
dividends 1,609 2,073 1,294

rP
Net loss (income) attributable to noncontrolling
interests 63 (240) (86)
Preferred stock dividends (163) (63) (17)
Net income available to common stockholders 1,509 1,770 1,191

Earnings per common share—basic (in USD) 25.58 31.74 23.05

yo
Source: SVB, FY2022 Financial Statements, 10K Report, p. 96.
op
tC
No
Do

17

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 3: SVB CONSOLIDATED BALANCE SHEETS

t
os
31 31 31
December December December
2022 2021 2020
(USD in millions)
Assets:
Cash and cash equivalents 13,803 14,586 17,675

rP
Available-for-sale securities, at fair value (cost
of $28,602 and $27,370 and $30,245
respectively) 26,069 27,221 30,913

Held-to-maturity securities, at amortized cost

and net of allowance for credit losses of $6 and

yo
$7 and $392 (fair value of $76,169 and $97,227
and $17,217, respectively) (Note 1) 91,321 98,195 16,592
Non-marketable and other equity securities 2,664 2,543 1,802
Total investment securities 120,054 127,959 49,307

Loans, amortized cost 74,250 66,276 45,181

Allowance for credit losses: loans (636) (422) (447)
op
Net loans 73,614 65,854 44,734

Premises and equipment, net of accumulated

depreciation and amortization 394 270 176
Goodwill 375 375 142
Other intangible assets, net 136 160 61
tC

Lease right-of-use assets 335 313 210

Accrued interest receivable and other assets 3,082 1,791 3,206
Total assets 211,793 211,308 115,511

Liabilities:
Noninterest-bearing demand deposits 80,753 125,851 66,519
No

Interest-bearing deposits 92,356 63,352 35,463

Total deposits 173,109 189,203 101,982

Short-term borrowings 13,565 71 21

Lease liabilities 413 388 259
Other liabilities 3,041 2,467 3,972
Long-term debt 5,370 2,570 844
Total liabilities 195,498 194,699 107,078
Do

SVB Financial Group stockholders’ equity:

Preferred stock, $0.001 par value 3,646 3,646 340
Common stock, $0.001 par value (Note 1) - - -

18

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

Additional paid-in capital 5,318 5,157 1,585

t
Retained earnings 8,951 7,442 5,672

os
Accumulated other comprehensive income
(loss) (1,911) (9) 623
Total SVB Financial Group stockholders’
equity 16,004 16,236 8,220
Noncontrolling interests 291 373 213
Total equity 16,295 16,609 8,433

rP
Total liabilities and total equity 211,793 211,308 115,511

Note 1: The unrealized gain/(loss) on held-to-

maturity securities, after deducting the “amortized
cost and net of allowance for credit losses” from
the fair value. (15,152) (968) 625

yo
Sources: SVB, FY2022 Financial Statements, 10K Report, p. 95.
SVB, FY2020 Financial Statements, 10K Report, p.101, https://ir.svb.com/financials/annual-
reports-and-proxies/default.aspx, accessed 2 April 2023.
op
tC
No
Do

19

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 4: SVB SHARE PRICE MOVEMENT

t
(i) Share Price of SVB (NASDAQ: SIVB) from March 2018 to March 2023.

os
rP
yo
Note: SVB shares closed at USD106.04 on 9 March 2022.
op
Source: SVB share quote, Google Finance,
https://www.google.com/finance/quote/SIVBQ:OTCMKTS?hl=en&window=5Y, accessed 22
March 2023.

(ii) Nasdaq Composite Index from March 2018 to March 2023.

tC
No
Do

Note: On 10 March 2023, NASDAQ Composite Index closed at 11,138.89.

Source: NASDAQ Composite Index, Google Finance,
https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?window=5Y, accessed 22
March 2023.

20

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 5: SVB MANAGEMENT ON 8 MARCH 2023

t
os
Dan Beck Greg Becker Marc Cadieux John China

Chief Financial President and CEO Chief Credit Officer President SVB Capital
Officer
(29 years at SVB) (30 years at SVB) (26 years at SVB)
(5 years at SVB)

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Phil Cox Laura Cushing Mike Descheneaux Michelle Draper

Chief Operations Chief Human President Silicon Chief Marketing &

Officer Resources Officer Valley Bank Strategy Officer

(13 years at SVB) (Joined SVB 2022) (17 years at SVB) (9 years at SVB)

Jeffrey Leerink Kim Olson John Peters Michael Zuckert

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CEO SVB Securities Chief Risk Officer Chief Auditor General Counsel

(4 years at SVB) (Joined SVB 2022) (16 years at SVB) (8 years at SVB)

Source: “Strategic Actions/Q1’23 Mid-Quarter Update,” SVB, 8 March 2023, p. 27,

https://static.seekingalpha.com/uploads/sa_presentations/962/91962/original.pdf, accessed 14 March
2023.
op
tC
No
Do

21

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 6: CLASSIFICATION OF DEBT SECURITIES

t
The Accounting Standard Code ASC 320 described the accounting and reporting requirements

os
for debt securities. “Debt securities should be classified into one of three categories at
acquisition:

• Held to maturity
• Available for sale
• Trading

rP
The classification of a debt security is important to the application of ASC 320 because the
accounting treatment and related disclosures are different for each of the three categories. A
reporting entity should document its classification of a debt security at acquisition.
Classification as a held-to-maturity security should be reassessed each reporting period.”

2) ASC 320-10-25-1(c) described held-to-maturity securities. Below is excerpt from ASC 320-

yo
10-25-1(c):

“Held-to-maturity securities. Investments in debt securities shall be classified as held-to-

maturity only if the reporting entity has the positive intent and ability to hold those securities
to maturity.

The positive intent and ability to hold debt securities to maturity is different from not having
an intent to sell. If a reporting entity’s intention is uncertain, the security should not be classified
op
as held to maturity. A reporting entity’s intent and ability to hold a debt security to maturity is
typically evidenced through written representation, as well as other evidence, such as historical
experience, board and investment committee minutes, documented investment strategies,
instructions to portfolio managers, future business plans, and projections of liquidity and capital
adequacy. The intent and ability to hold a debt security to maturity should be reassessed at each
reporting period.
tC

The held-to-maturity classification is restrictive. ASC 320-10-25-4 and ASC 320-10-25-

5 include specific circumstances and scenarios that preclude a reporting entity from classifying
securities as held to maturity. For example, a security may not be classified as held to maturity
if it can be contractually prepaid or otherwise settled in such a way that the holder will not
recover substantially all of its recorded investment. Securities that a reporting entity may sell
based on changes in interest rates, prepayment risk, foreign exchange rates, the entity’s liquidity
or funding sources/terms, or the availability of yield on other investments should also not be
No

classified as held to maturity.”

Source: “Classification of debt securities,” US PwC Loans & investments guide 3.3, 31 May
2022,
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loans_and_investment/loans_and_investme
nt_US/chapter_3_accounting__1_US/33_classification_of_US.html, accessed 7 May 2023.
Do

22

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 7: SVB CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

t
os
31 31 31
December December December
2022 2021 2020
(USD in millions)
Net income before noncontrolling interests 1,609 2,073 1,294
Other comprehensive income (loss), net of tax:

rP
Change in foreign currency cumulative
translation gains and losses:
Foreign currency translation gains
(losses), net of hedges (54) (2) 16
Related tax benefit (expense) 15 - (5)

Change in unrealized gains and losses on AFS

yo
securities:
Unrealized holding gains (losses) (2,503) (644) 606
Related tax benefit (expense) 686 179 (168)
Reclassification adjustment for (gains)
losses included in net income (21) (31) (61)
Related tax expense (benefit) 6 9 17
op
Cumulative-effect adjustment for unrealized
losses on securities transferred from AFS to
HTM - (132) -
Related tax benefit - 37 -

Amortization of unrealized holding (gains)

losses on securities transferred from AFS to
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HTM 13 (1) 2
Related tax expense (benefit) (4) - (1)

Change in unrealized gains and losses on

cash flow hedges:
Unrealized gains (losses) - - 232
Related tax (expense) benefit - - (64)
No

Reclassification adjustment for gains

included in net income (56) (63) (50)
Related tax expense 16 17 14
Other comprehensive income (loss), net of tax (1,902) (631) 538
Comprehensive income (loss) (293) 1,442 1,832
Comprehensive (income) loss attributable to
noncontrolling interests 63 (240) (86)
Do

Comprehensive income (loss) attributable to

SVB Financial Group (230) 1,201 1,746

Source: SVB, FY2022 Financial Statements, 10K Report, p. 97.

23

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

EXHIBIT 8: REGULATORY TESTS OF US BANKS

t
Capital Adequacy Ratio (CAR)

os
The CAR was an indicator used globally of how well a bank could meet its obligations by
comparing its capital ranked in two tiers to “risk-weighted assets.”

The formula for the total capital ratio was CAR = (Tier 1 + Tier 2 capital) / “risk weighted
assets.”

rP
The components of the formula were:

a) Tier-1 capital was the core funds that a bank had on hand to manage losses so that it could
continue operating. It commonly included equity capital, ordinary share capital, intangible
assets, and audited revenue reserves.

Tier-1 capital ratio was CAR = Tier 1 capital / “risk weighted assets.”

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b) Tier-2 capital was the secondary supply of funds available from the sale of assets once a
bank closed down, including unaudited retained earnings, unaudited reserves, and general
loss reserves.

c) “Risk-weighted assets” were calculated under Basel III, from a bank’s assets on its balance
sheet, such as loans to clients, debt investments and other assets. They were evaluated based
on their risk levels, and then assigning a weight or value as the “risk-weighted assets.”
op
Sources: Adam Hayes, “What the Capital Adequacy Ratio (CAR) Measures, With Formula,”
Investopedia.com, 17 April 2023,
https://www.investopedia.com/terms/c/capitaladequacyratio.asp, accessed 22 May 2022.
Adam Hayes, “Tier 1 Capital Ratio: Definition and Formula for Calculation,” Investopedia.com,
20 November 2020, https://www.investopedia.com/terms/t/tier-1-capital-ratio.asp, accessed 4 June
2023.
tC

Stress Test
“Starting in 2013, the Federal Reserve’s capital assessment of large banks consisted of two
primary components: the Dodd-Frank Act Stress Test (stress test) and the Comprehensive
Capital Analysis and Review (CCAR).

The stress test is a forward-looking quantitative evaluation of bank capital that demonstrates
No

how a hypothetical macroeconomic recession scenario would affect firm capital ratios. For the
first several years of stress testing, CCAR was a public exercise that included a quantitative and
qualitative assessment. The quantitative assessment evaluated whether banks had sufficient
capital to continue operations throughout times of economic and financial market stress. The
qualitative assessment evaluated whether banks had robust, forward-looking capital planning
processes that account for their unique risks.

Source: “Stress Test,” The Fed, https://www.federalreserve.gov/supervisionreg/stress-tests-capital-

planning.htm, accessed 22 May 2023.
Do

Financial Stability and Stress Testing

“The stress testing process, which includes the supervisory stress tests and company-run stress
tests. The supervisory stress test assesses whether firms are sufficiently capitalized to absorb
losses during stressful conditions while meeting obligations to creditors and counterparties and
continuing to be able to lend to households and businesses.

24

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 23/769C Governance Lessons in Silicon Valley Bank’s Failure

The Board integrates the results from the supervisory stress test with its non-stress capital

t
requirements through the stress capital buffer into one forward-looking and risk-sensitive
capital framework. Firms must also conduct and publicly disclose the results of their company-

os
run stress tests based on their risk profiles, as defined by the Board’s stress testing rules.”

Source: “Financial Stability and Stress Testing,” The FED,

https://www.federalreserve.gov/financial-stability/financial-stability-and-stress-testing.htm, accessed
22 May 2023.

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EXHIBIT 9: SVB CONSOLIDATED STATEMENTS OF CASH FLOWS

31 31 31

yo
December December December
2022 2021 2020
(USD in millions)
Net cash provided by (used
in) operating activities 2,864 1,868 1,412
Net cash provided by (used
in) investing activities (3,638) (90,336) (31,206)
op
Net cash provided by (used
in) financing activities (9) 85,432 40,656
Net increase/(decrease) in
cash, cash equivalents and
restricted cash (783) (3,036) 10,862
tC

Cash, cash equivalents and

restricted case at
beginning of the year 14,586 17,622 6,760
Cash, cash equivalents and
restricted cash at end of
the year 13,803 14,586 17,622
No

Source: SVB, FY2022 Financial Statements, 10K Report, p. 99.

Do

25

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