Former Silicon Valley bank CEO Greg Baker plans to tell US lawmakers on Tuesday that no bank could have outgrown the $142 billion downturn on the California bank that led to its collapse and spread panic throughout the rest of the financial system.
The prepared comments, released Monday ahead of a Senate Banking Committee hearing in Washington, would be the first from the CEO since the Silicon Valley bank backtracked nearly 10 weeks ago.
Depositors withdrew $42 billion from the Santa Clara, California, institution in one day and demanded another $100 billion be withdrawn the day regulators seized the lender. In his testimony, Baker says that the previous largest bank trade in US history was $19 billion in deposits over 16 days.
“I don’t think any bank could survive a bank run of this speed and magnitude,” Baker says in his prepared remarks.
He intends to apologize for the bank’s downfall, calling his takeover “personally and professionally devastating” while noting, “I’m really sorry.”
He also plans to defend the decision to cash in stock and options in the weeks leading up to the bank’s collapse, while blaming the bank’s troubles between “rumors and misconceptions” fueled by social media to an aggressive series of rate hikes by the federal government. The reserve came as a surprise.
Interest rate increases by the Federal Reserve have lowered the value of the Silicon Valley bank’s bonds, forcing it to sell assets at a loss once depositors start withdrawing their money. This sale, which it disclosed on March 8, contributed to raising doubts and panic among depositors and investors.
Two months of chaos
The bank’s downfall marked the beginning of more than two months of chaos in the regional banking industry. Two other large banks, Signature Bank and First Republic, have also been taken over by regulators in the wake of similar filings.
Two other Signature Bank executives will also testify alongside Baker on Tuesday. Former chairman Scott Shay intends to say: “I thought the bank was in a strong position to weather the storm” but “regulators clearly saw things differently”.
Baker’s prepared remarks on the Silicon Valley bank provide a counter-history to recent testimony from regulators and a report from the Federal Reserve that largely blamed mismanagement for the lender’s eventual collapse.
Regulators said they had raised concerns with the bank about its risk management practices, but should have pushed harder for reforms.
But Baker says that as the bank grew in 2021 and 2022, bringing new levels of US oversight, it has worked to improve its governance, controls, liquidity and risk management after getting feedback from regulators.
By the end of 2022, he says, the bank’s capital ratios were the same or higher than their peers, and well above regulatory thresholds for well-capitalized banks.
“During this time, the feedback from regulators has been that SVB has sufficient capital and liquidity,” he says.
But by then, the Fed had also begun to raise interest rates dramatically, causing unrealized losses to the bank’s bond portfolio. Many other banks have also accumulated such unrealized losses.
Baker points out that this was a surprise to the bank. It did, he says, even though in 2021 the Fed “characterised inflation as a passing risk, suggesting that interest rates will not rise significantly in the short term.”
In the week the bank went down, it decided to sell some of these securities and lose $1.8 billion. It also said it intends to raise an additional $2.25 billion in equity capital to bolster its balance sheet. Those twin announcements stunned depositors and investors.
What didn’t help, Baker says, was a previous Financial Times newspaper report that compared the Silicon Valley bank to another crypto-focused lender named Silvergate Bank. Silvergate had decided in early March to voluntarily calm down.
This connection, he says, led to the spread of “rumors and misconceptions” online and led depositors to fear that a Silicon Valley bank was in a similar position.
“SVB and Silvergate were two very different banks, with Silvergate being almost 100 percent crypto-focused and SVB only having about 3 percent of its deposits from crypto customers,” says Becker.
“I did nothing to speed up this trade.”
After his bank went under on March 10, Baker received criticism for selling stock and options before the crash and receiving an earlier bonus.
In his testimony, the CEO will defend this sale as a routine procedure and in line with his previous practice of selling stock and stock options periodically.
He says he owns roughly five times the amount of shares required by the bank’s board of directors, and as CEO he regularly sold the underlying shares of his stock options before they expired through 10b5-1 plans.
Baker says SVB’s legal team approved his plan to sell the stock options on the basis that he did not possess any material non-public information at the time. Baker says the deal executed just 11 days before SVB failed was based on a predetermined share price and date.
“I did nothing to speed up this trade and only learned that it was done after the fact,” Baker said.
As for the former CEO’s compensation, he says that was determined by the bank’s human resources department in advance and there was nothing “erratic or hurried” about the payment.
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