Case Details
Governance Lessons in Silicon Valley Bank’s Failure
The Silicon Valley Bank of SVB Financial Group (NASDAQ: SIVB) supported tech startups and venture capital funds primarily in Silicon Valley. On 8 March 2023, the bank attempted to raise equity and sell debt securities to improve liquidity, but was unsuccessful. Doubts about the bank’s solvency led its depositors to withdraw cash, totaling around USD42bn. On 10 March 2023, the US regulators shut down the bank and halted its shares from trading on NASDAQ.
In 2021, SVB invested heavily in long-dated securities, such as mortgage bonds securities, and US treasury 10-year bonds to be held until maturity, thus classifying the majority of them as HTM. HTM securities were recorded at amortized cost, and changes in fair market value were only disclosed. After interest rate hikes starting at the end of March 2022, SVB disclosed unrealized loss on HTM securities, and on 31 December 2022, it was USD15.1bn, and total equity was USD16.3bn.
Recording unrealized losses would force many US banks to incur significant losses, requiring replenishment of capital reserves. What approach should the board of the Financial Accounting Standards Board take to provide useful information to users of financial reports, and also balance the interests of the banking industry?
Learning Objective:
- To examine corporate governance, risk management and internal control, influencing bank runs and failures.
- To understand banks’ accounting policies in unrealized gain or loss on AFS and HTM securities, and their influence on banks’ investment decisions.
- To evaluate whether debt securities accounting methods are sufficient in reflecting banks’ financial performance.
- To explore measures by bank regulators and external parties to monitor a bank’s financial stability, and limitations.