GOOD. AFTERNOON AND WE ARE
HOSTING AN INFORMATIONAL HEARING
ON THE COLLAPSE OF SILICON
VALLEY BANK WHAT HAPPENED AND
WHAT IT MEANS FOR BANKING
REGULATION MEMBERS ARE ALL
SPREAD OUT, UH, COMMITTEE
HEARINGS, PRESENTING BILLS, UH,
OF THE COMMITTEE, BUT THEY WILL
BE COMING IN AND OUT. BUT THE
MOST IMPORTANT THING IS THAT WE
ARE BEING PROACTIVE. WE WERE
MOVING FORWARD AND WITH THIS
HEARING AND THAT MEMBERS WILL BE
ABLE TO GO BACK AND OBSERVE. THE
HEARING IN ITS FULL ENTIRETY.
AND HERE ALL OF TESTIMONY. SO
WITH THAT AGAIN GOOD AFTERNOON
AND WELCOME EVERYONE TO OUR
FIRST HEARING REGARDING THE
COLLAPSE OF SILICON VALLEY BANK
OFTEN CALLED SVB AND PLEASE NOTE
THAT THERE IS A BACKGROUND PAPER
PUBLISHED ON THE COMMITTEE'S
WEBSITE, AND THERE ARE COPIES
HERE IN THE ROOM AND TODAY'S
MATERIALS. FROM OUR PRESENTERS
WILL ALSO BE PUBLISHED ON THE
WEBSITE. THE PURPOSE OF THIS
HEARING IS TO LEARN ABOUT SVB S
FAILURE AND WHAT NEXT STEPS THE
LEGISLATURE SHOULD CONSIDER, AS
WE THINK THROUGH WAYS TO SHORE
UP CALIFORNIA'S BANKS AS A STATE
AS A STATE CHARTERED BANK SVB
WAS SUPERVISED BY OUR REGULATOR
, THE DEPARTMENT OF FINANCIAL
PROTECTION AND INNOVATION ALONG
WITH THE FEDERAL RESERVE. D P. I
HAS ANNOUNCED IT WILL RELEASE
ITS OWN REPORT IN EARLY MAY,
ABOUT SVB ABOUT THE SVB
COLLAPSED AND D A P I
SUPERVISION OF THE BANK. THIS
COMMITTEE WILL ALSO RECONVENE
AFTER THE RELEASE OF THAT REPORT
. THEREFORE I CONSIDER TODAY'S
HEARING MORE OF A PROLOGUE TO A
DEEPER DIVE INTO THE POLICY
ISSUES RAISED BY THE MARCH 2020
23 EVENTS. BUT THIS WILL BE A
VERY SUBSTANTIVE PROLOGUE
BECAUSE WELL, THERE'S A LOT TO
DISCUSS, AND WE LOOK FORWARD TO
HEARING FROM OUR PRESENTERS. THE
SVB FAILURE WAS A MAJOR EVENT IN
BANKING AND FINANCE. AND THEN
JUST ONE DAY ROUGHLY 40 BILLION
WAS WITHDRAWN FROM THE BANK DUE
TO THE FEARS OF THE BANK'S
FINANCIAL HEALTH. THIS WAS ONE
OF THE LARGEST BANK FAILURES IN
HISTORY, AND THIS WASN'T JUST
ANY BANK. SVB WAS ESSENTIAL TO
THE TECH SECTOR, ONE OF THE MOST
IMPORTANT ENGINES OF ECONOMIC
GROWTH IN CALIFORNIA SINCE THE
BANK'S FAILURE IN EARLY MARCH.
WE HAVE LEARNED A LOT ABOUT WHAT
HAPPENED. WE HAVE LEARNED THAT
SVB WAS EXPOSED TO WHAT IS
CALLED INTEREST RATE RISK, WHICH
IS A TYPE OF RISK. WE WILL LEARN
MORE ABOUT TODAY AND AS WE BE
MANAGEMENT DID NOT ADDRESS THIS
RISK, DESPITE NUMEROUS WARNINGS.
WE HAVE LEARNED THAT SVB RELIED
HEAVILY ON VENTURE CAPITALIST
TECH COMPANIES AND STARTUPS FOR
ITS BUSINESS, AND THESE
COMPANIES AND INVESTORS HAVE
BEEN STRUGGLING AND THE CURRENT
ECONOMIC ENVIRONMENT THIS MADE
SVB UNIQUELY VULNERABLE. WE HAVE
LEARNED THAT SVB HAD SIGNIFICANT
DEPOSITS WELL ABOVE THE
FEDERALLY INSURED LEVEL OF
$250,000. BY THE END OF 2020 TO
AROUND 88% OF THE BANK'S
DEPOSITS WERE UNINSURED. WE HAVE
LEARNED THAT IMPORTANT FEDERAL
BANKING RULES WERE MODIFIED IN
2019 AND MAY HAVE LAID THE
FOUNDATION FOR SVB S FAILURE. WE
HAVE LEARNED THAT IN TODAY'S
SOCIAL MEDIA CLIMATE, IT IS
REMARKABLY EASY TO SPREAD
CONCERN AMONG A BANK'S CUSTOMERS
, AND WE HAVE LEARNED THAT
FEDERAL SUPERVISORS IDENTIFIED
THE RISKS AND PROBLEMS. AND AS
WE VE SVB S BUSINESS MODEL AND
WARNED THE BANKS MANAGEMENT OF
THESE RISK, BUT IT DOES APPEAR
THAT SVB IGNORED THOSE WARNINGS
AND THAT REGULATORS DID NOT TAKE
THE NEXT STEP AND COMPELLING A
CHANGE IN THE BANK'S PRACTICES.
THE MORE WE LEARN ABOUT SVB
COLLAPSE, THE MORE I AM CERTAIN
THAT THERE ARE NO EASY ANSWERS
OR CONVENIENT EXPLANATIONS. FOR
AN EVENT LIKE THIS. MANY THINGS
HAVE TO GO WRONG AND THEY HAVE
TO GO WRONG AT THE SAME TIME
TODAY IS ABOUT IDENTIFYING WHAT
WENT WRONG SO THAT WE CAN
IDENTIFY WHAT HAS TO HAPPEN OR
MUST HAPPEN NEXT. IF YOU OTHER
NOTES BEFORE WE BEGIN FIRST SVB
IS NOT ONLY A CALIFORNIA BANK
THAT IS, UH, THAT THAT HAS
STRUGGLED THIS YEAR. SILVER
GATE, A BANK THAT CATERED TO
CRYPTOCURRENCY COMPANIES WOUND
DOWN LAST MONTH, AND FIRST
REPUBLIC BANK WAS THE TARGET OF
SIGNIFICANT INDUSTRY LED
INTERVENTIONS TO HELP STABILIZE
IT. AND THOUGH OUR FOCUS TODAY
IS PRIMARILY ON SVB, THE
EXPERIENCES OF THESE BANKS ARE
ALSO RELEVANT TO OUR DISCUSSION
, AND WE WILL HEAR MORE ABOUT
THEM AS WELL. SECOND THIS
COMMITTEE WILL NEED TO TAKE A
SERIOUS LOOK AT D F P
SUPERVISION OF SVB, AND IT'S
IMPORTANT TO EXPLORE WHAT TOOLS
DO YOU HAVE P I HAS AT ITS
DISPOSAL WHEN IT IDENTIFIES
PROBLEMS IN A BANK AND WHETHER D
F P I IS EMPOWERED TO USE THOSE
TOOLS. I HAVE TREMENDOUS RESPECT
FOR COMMISSIONER HEWLETT AND HER
TEAM. AND I AM HOPEFUL THAT THE
FBI AND THE LEGISLATURE CAN HAVE
AN HONEST AND PRODUCTIVE
CONVERSATION ABOUT WHAT IS
WORKING AND WHAT ISN'T WITH ITS
SUPERVISION OF STATE CHARTERED
BANKS. IF THERE ARE SHORTCOMINGS
, THEN YES, WE SHOULD ADDRESS
THEM. ONCE THE FBI HAS RELEASED
ITS REPORT, WE WILL INVITE THE D
FBI TEAM TO PRESENT THAT REPORT
BEFORE THIS COMMITTEE AND
ANNOUNCEMENT WILL BE COMING
FORTH COMING VERY SOON. THANKS
AGAIN TO EVERYONE WHO HAS JOINED
US TODAY AND I WANT TO OPEN IT
UP TO ANYONE, UH, AS FAR AS
MEMBERS AS THEY COME IN, SO WE
MIGHT INTERRUPT IF THEY HAVE A
COMMENT OR WAIT BETWEEN
PRESENTERS TO ALLOW CERTAIN ONES
TO COME IN AND ACCOMMODATE THE
SCHEDULE TO BE ABLE TO MAKE
COMMENTS BEFORE THEY HAVE TO
AGAIN. LEAVE SO WITH THAT,
OPENING IT UP TO OTHER MEMBERS
TO SAY, COME IN. JUST BE
PREPARED FOR THAT IF WE HAVE TO
INTERRUPT YOU AT THE LAST SECOND
OTHER THAN THAT, I DO WANT TO
TURN TO OUR FIRST PANELIST. AND
THAT WOULD BE TODD BAKER, UH,
WHO IS FINANCIAL SERVICES
EXECUTIVE WHOSE CAREER HAS LED
HIM FROM CORPORATE LAW TO
LEADERSHIP ROLES AT SEVERAL OF
THE LARGEST DOMESTIC AND
INTERNATIONAL BANKS AND ROLES AS
AN ACADEMIC CONSULTANT, WRITER,
SPEAKER AND COMMENTATOR ON
BANKING, FINANCIAL TECHNOLOGY,
CONSUMER FINANCIAL ACCESS AND
REGULATION ISSUES. EUROPE
CURRENTLY, HE IS AH, CURRENTLY,
IF I UNDERSTAND IT CORRECTLY
SENIOR FELLOW AT THE RICHARD
PAUL RICHMOND CENTER FOR
BUSINESS ALSO LAW AND PUBLIC
POLICY AT COLUMBIA BUSINESS
SCHOOL AND COLUMBIA LAW SCHOOL.
AND WITH THAT, MR BAKER, WE ARE
EXCITED TO BE ABLE TO HEAR YOUR
TESTIMONY TODAY. PLEASE I
APPRECIATE YOUR OPENING
COMMENTS, AND I JUST WANT TO
POINT OUT TO PEOPLE THAT I DO
LIVE IN BERKELEY, CALIFORNIA, SO
I'M A CALIFORNIA AND FOR MANY
YEARS EXCELLENT. SO IN LINE WITH
YOU IN LINE WITH YOUR
INTRODUCTION, I'M GOING TO TALK
ABOUT CAUSES. UH EFFECTS AND
SOME OF THE CONSEQUENCES OF WHAT
HAPPENED AT SILICON VALLEY BANK
. SO IF WE CAN ADVANCE THE
SLIDES, UH, TO SLIDE TO SO I'M
GOING TO RUN THROUGH THE CAUSES
HERE. I'M GOING TO DO IT IN MORE
DETAIL, SO I'M NOT GOING TO GO
THROUGH THIS SLIDE. NEXT SLIDE.
THE EFFECTS OF THOSE THAT WHAT
ACTUALLY HAPPENED AT SILICON
VALLEY BANK. UH, NEXT SLIDE,
PLEASE. THEN WE'RE GONNA LOOK AT
SOME UNANSWERED QUESTIONS. AND
FINALLY, UM, THE NEXT SLIDE SOME
KEY POLICY ISSUES. AH, NEXT
SLIDE, PLEASE. SO IT IT'S WORTH
NOTING THAT IT'S ALL HAPPENED
WITHIN A PERIOD OF ABOUT THREE
WEEKS, UM FROM THE INITIAL, UH,
INDICATION OF PROBLEMS AT THE
TIME ON MARCH 8TH THROUGH THE
SALE OF THE REMAINING SILICON
VALLEY BANK ASSETS AND
LIABILITIES TO FIRST CITIZENS
BANK ON MARCH 27TH SO VERY QUICK
TIME. OKAY. COULD YOU MOVE TO
SLIDES FORWARD? SO WHAT WE'RE
REALLY TALKING ABOUT HERE IS THE
BACKGROUND. UM UH. WHAT HAPPENED
TO SILICON VALLEY BANK WAS IN
PART THE RESULT OF A LONG PERIOD
OF VERY LOW INTEREST RATES AND
HIGH GROWTH IN THE TECHNOLOGY
BUSINESS. SO THIS SLIDE EIGHT
HERE SHOWS THE GROWTH OF THE
DIGITAL ECONOMY OVER THE LAST 10
OR 15 YEARS, STEADY GROWTH AND
THEN A VERY ENORMOUS INCREASE IN
THE YEARS LEADING UP TO, UM AH,
THIS PAST YEAR, 2002. NEXT
SLIDE. AT THE SAME TIME, AND
THIS WAS PRINCIPALLY A RESULT OF
THE, UM 2008 FINANCIAL CRISIS
AND THE INTERVENTIONS OF THE FED
INTEREST RATES WERE VERY LOW FOR
VERY LONG AND FOR A LONG PERIOD
, ESSENTIALLY AFFECTIVE INTEREST
RATES CLOSE TO ZERO. NEXT SLIDE.
AS A RESULT OF THAT BANK DEPOSIT
RATES, THE RATES THAT MADE BANKS
PAID ON DEPOSITS WERE ZERO TO
EXTREMELY LOW AGAIN UNTIL QUITE
RECENTLY WHEN THE FED STARTED
RAISING RATES. NEXT SLIDE. AH!
TWO OTHER THINGS MADE THIS LAST
PERIOD. UM SORT OF A GOLDILOCKS
PERIOD. CREDIT PERFORMANCE WAS
AS GOOD AS IT'S BEEN IN MY
CAREER AND FOR AS LONG AS IT'S
BEEN IN MY CAREER, SO NO CREDIT
PROBLEMS, THE ECONOMY AND, UM
THE NEXT SLIDE. EQUITY MARKETS
BOOMED FOR AN EXTENDED PERIOD.
STOCK PRICES, PARTICULARLY FOR
TECHNOLOGY COMPANIES, ROSE
THROUGH THIS ENTIRE PERIOD. NEXT
SLIDE. OKAY UM ALL GOOD THINGS
HAVE TO COME TO AN END AND AH,
INFLATION REARED ITS HEAD AS A
RESULT OF COVID AND VARIOUS
OTHER FACTORS AND THE FED FOR
THE FIRST TIME IN A VERY LONG
TIME STARTED TO RAISE INTEREST
RATES. UM, NEXT SLIDE. SO SHORT
TERM INTEREST RATES BEGAN TO
SPIKE. UM AS WHAT WAS CALLED
QUANTITATIVE EASING, ENDED AND,
UM, NEXT SLIDE AND YOU'LL SEE
THAT THIS RATE RISE, THE ONE
THAT'S CIRCLED THERE. THE ARROW
TO THE LEFT WAS THE FASTEST AND
STEEPEST OF ALL THE RATE ACTIONS
BY THE FED OVER THE LAST 30 OR
40 YEARS. SO, UH, EXCEPTIONALLY
FAST. AND EXCEPTIONALLY HIGH
RATE, UH, INTEREST RATE RATES
OVER A VERY SHORT TIME. NEXT
SLIDE. UM THIS COINCIDED AND
THERE WAS SOME CAUSE AND EFFECT
RELATIONSHIP HERE FOR SURE WITH
A DECLINE IN THE TECH ECONOMY,
THE TECH ECONOMY PEAKED ABOUT
THE SAME TIME THAT INTEREST
RATES STARTED TO RISE AND THE
STOCK PRICES OF ALL THE TECH
COMPANIES, UH, DROP VERY RAPIDLY
IN 2002 WAS PARTICULARLY
DIFFICULT. UM IN THAT REGARD AND
THE TECHNICAL TO ME, WHICH HAD
BEEN BOOMING FOR AN EXTENDED
PERIOD, REALLY, 10 YEARS
SUDDENLY GROUND TO A HALT AND
STARTED REVERSING NEXT PAGE. NEW
VENTURE INVESTMENT IN TECHNOLOGY
ALSO BEGAN TO DECLINE VERY
RAPIDLY AT THE SAME TIME AS
STOCK PRICES FOR ESTABLISHED
COMPANIES DROPPED. THIS IS
HIGHLY RELEVANT BECAUSE OF
SILICON VALLEY'S MAJOR BUSINESS
WAS PROVIDING ASSISTANCE TO
VENTURE BACKED COMPANIES AND
MORE LATE STAGE TECHNOLOGY
COMPANIES NEXT PAGE. AH RIGHT AS
RATES ROSE. UM UH, DEPOSITS
STARTED TO LEAVE THE BANKING
SYSTEM. THIS IS ONLY THROUGH THE
FIRST COUPLE OF QUARTERS OF 2002
. BUT IF WE EXTENDED THIS, UH,
CHART OUT, YOU WOULD SEE VERY
SUBSTANTIAL REDUCTIONS IN
DEPOSIT BALANCES IN THE BANKS,
AND THIS IS BECAUSE WHILE
INTEREST RATES WERE ZERO
ESSENTIALLY THERE WAS NO COST OF
LEAVING MONEY AND DEPOSIT
ACCOUNTS THAT DIDN'T PAY
INTEREST. UM SILICON VALLEY HAD
A VERY LARGE NUMBER OF THOSE
ACCOUNTS. BUT AS INTEREST RATES
ROSE, AND A YIELD BECAME
IMPORTANT AGAIN, UM INVESTORS
STARTED LOOKING FOR PLACES TO
PUT THEIR MONEY WHERE THEY WOULD
EARN MORE INTEREST AND STARTED
PULLING MONEY OUT OF THE BANKING
SYSTEM. NEXT SLIDE. OKAY SO
THAT'S SORT OF THE ENVIRONMENTAL
SITUATION WHICH WAS A CYCLE. UM
WHAT'S HAPPENING IN TECHNOLOGY
AT THE SAME TIME AS THE CYCLE
WAS HAPPENING IN INTEREST RATES
AND THE IMPACT THAT HAD ON THE
BANKING INDUSTRY WAS SIGNIFICANT
IN TERMS OF DEPOSIT FLOWS,
DEPOSITS STARTED TO LEAVE THE
BANKING INDUSTRY. UM OKAY.
SILICON VALLEY BANK HAD A UNIQUE
BUSINESS MODEL. IT WAS FOUNDED
BACK IN THE 19 EIGHTIES, UM, AT
THE TIME OF ITS FAILURE WAS THE
LARGEST CALIFORNIA STATE
CHARTERED BANK. UM THE FEDERAL
RESERVE, AS YOU NOTED, WAS ITS
PRIMARY FEDERAL REGULATOR AND
THE D F P I WAS AT STATE
REGULATOR. IT HAD A UNIQUE FOCUS
ON THE GLOBAL TECH INDUSTRY. IT
PROVIDED SUPPORT FOR STARTUPS,
VENTURE CAPITALISTS ESTABLISHED
TECHNOLOGY COMPANIES, AND IT'S
IMPORTANT TO NOTE THAT ITS
ACTIVITIES WERE INTERNATIONAL IN
SCOPE, NOT JUST IN CALIFORNIA OR
IN THE U. S. BUT ALSO IN EUROPE
AND ASIA. IT ALSO, INTERESTINGLY
WAS PRIME SPONSOR OF THE OF THE
WINE INDUSTRY IN CALIFORNIA, A
SMALL BUSINESS OR SILICON VALLEY
BANK, BUT A VERY BIG IMPACT
BUSINESS FOR THE WINERIES. AND
IT HAD A LARGELY UN DIVERSIFIED
RISK PROFILE. WHAT I MEAN BY
THAT IS UNLIKE, FOR EXAMPLE,
BANK OF AMERICA, WHICH IS A
NATIONWIDE IN SCOPE, BANKS,
CONSUMERS, BANKS, ALL DIFFERENT
KINDS OF BUSINESSES. IT'S NOT
HIGHLY CONCENTRATED IN ONE AREA
. SILICON VALLEY BANK WAS VERY
CONCENTRATED IN, UM LOANS AND
ACTIVITIES ASSOCIATED WITH TECH
AND TECH FUNDRAISING. AS A
RESULT OF THAT IT'S DEPOSIT BASE
COMPARED TO OTHER BANKS WAS MORE
VOLATILE, TIED TO THE TECH
INDUSTRY CYCLE. IF YOU LOOK BACK
AT ITS HISTORY, YOU'LL SEE THAT
DEPOSIT BALANCES ROSE AND FELL
WITH TECH INDUSTRY CYCLES OVER
THE LAST 30 OR 40 YEARS. UM THIS
TIME BECAUSE WE HAD AN
EXCEPTIONALLY LONG TEXT CYCLE.
AN EXCEPTIONALLY LONG PERIOD OF
LOW INTEREST RATES REALLY
UNPRECEDENTED IN MY LONG CAREER
, UM, THE ASSETS AND DEPOSITS OF
SILICON VALLEY BANK GREW
ENORMOUSLY DURING THE LAST EIGHT
OR NINE YEARS, DEPOSITS AND
ASSETS GREW FROM ABOUT 50
BILLION TO ABOUT 200 BILLION OR
OVER 200 BILLION. UM BECAUSE OF
SILICON VALLEY BANK, ALTHOUGH IT
WAS A LENDER WAS NOT ABLE TO
FILL ITS BALANCE SHEET AND MATCH
THOSE DEPOSITS WITH LOANS. IT
HAD AN EXCEPTIONALLY LARGE
PERCENTAGE OF SECURITIES IN ITS
, UM ON ITS BALANCE SHEET, SO IT
HAD PLENTY OF LAWNS AS WELL SEE
CHART IN THE NEXT PAY. THERE YOU
GO. AND ALMOST ALL OF ITS
DEPOSITS FROM CORPORATIONS AND
BUSINESSES THAT ARE VERY FEW
INDIVIDUAL DEPOSITS, AND MY
NUMBER IS SLIGHTLY DIFFERENT
FROM YOURS. BUT 94% EXCEEDED THE
$250,000 COUNT. NEXT SLIDE. THIS
BANK WAS VERY IMPORTANT TO THE
CALIFORNIA INNOVATION ECONOMY,
UM, ABOUT 50% OF US VENTURE
BACKED COMPANIES USED SILICON
VALLEY BANK. UM IT FUNDED
BUSINESSES AND ALL TYPES OF
TECHNOLOGY AND BIOTECHNOLOGY TO,
UM UM, INTERNET COMPANIES TO, UM
, LIFE SCIENCES OF VARIOUS TYPES
REALLY DEEPLY INVOLVED IN
ANYTHING THAT THAT STARTED WITH
VENTURE CAPITAL NEXT SLIDE. AS I
MENTIONED IT HAD OPERATIONS
AROUND THE WORLD. NEXT SLIDE. IT
WAS BY US TERMS A LARGE BUT NOT
GIANT BANKS. SO 212 IS, UH,
BILLION IN ASSETS. I THINK MADE
IT ABOUT 25TH IF I RECALL
CORRECTLY IN SIZE AND 74 BILLION
IN TOTAL LOANS NEXT SLIDE. UM AS
I MENTIONED IT HAD RECENTLY,
VERY ACCELERATED DEPOSIT. UM,
GROWTH. YOU CAN SEE THAT THE
PERIOD END ASSETS ROSE VERY
SUBSTANTIALLY OVER THE LAST FIVE
OR SIX YEARS. NEXT PAGE. UM
UNLIKE MANY BANKS, THE STOCK OF
SILICON VALLEY BANK TRACKED THE
TECH MARKETS RATHER THAN OTHER
BANKS. IN OTHER WORDS, IT WAS
MOST CLOSELY CORRELATED WITH THE
NASDAQ. IT ROSE AND FELL WITH
THE TECH CYCLE RATHER THAN WITH
BANKING, AND THIS REFLECTED THE
FACT THAT IT'S BUSINESS DID VERY
WELL IN TIMES WHEN THE TECH
BUSINESS WAS DOING VERY WELL AND
LESS WELL IN TIMES WHEN IT WAS
IN DECLINE. EXT PAGE. NOW WE'LL
MOVE TO SOME OF THE THINGS THAT
ACCELERATED THE CRISIS AND
PARTICULARLY THE MANAGEMENT
QUESTIONS THAT THE CHAIRMAN
MENTIONED IT. SILICON VALLEY
BANK NEXT PAGE SO AS FED
GOVERNOR MICHAEL BARBS SAID IN
HEARINGS TWO WEEKS AGO. UM
SILICON VALLEY BANK'S FAILURE IS
A TEXTBOOK CASE OF MISMANAGEMENT
AND FOR A BANK OBSERVER THAT IS
VERY CLEAR. THEY FAILED IN THE
MOST BASIC, UM, WAY TO MANAGE
THE LIQUIDITY RISK. THAT IS TO
SAY THE RISK THAT THEIR THEIR
FUNDING SOURCES THROUGH DEPOSITS
WOULD BE MORE VOLATILE. AH THAN
EXPECTED AND THAT THEY WOULD
HAVE TO THEN USE CASH AND
SECURITIES THAT THEY HAVE ON
THEIR BALANCE SHEET TO PAY OFF
DEPOSITS AS THEY LEFT THE UM,
BANK. THEY HAD A HISTORY OF, UM
UH, SHALL WE SAY NOT FOLLOWING
BEST PRACTICES IN, UH, THE
LIQUIDITY MANAGEMENT SPACE. I
THINK IT WILL BE VERY
INTERESTING AS WE LEARN MORE
ABOUT WHAT EXACTLY HAPPENED OR
WHAT DIDN'T HAPPEN, BUT I THINK
WE'LL FIND A VARIETY OF
CIRCUMSTANCES WHERE THEY MADE
WRONG DECISIONS AROUND THAT RISK
. IT'S A IT'S BASIC TO THE
BANKING INDUSTRY THAT YOU DO NOT
WANT TO BE TAKING INTEREST RATE
RISK, BECAUSE INTEREST RATE RISK
IS ESSENTIALLY A BET. YOU DON'T
KNOW WHICH WAY INTEREST RATES
ARE GOING AND WHAT YOU TRY TO DO
IS HEDGE YOUR EXPOSURE, SO THAT
IF IT'S RATES GO UP OR DOWN,
YOUR BUSINESS IS RELATIVELY
LITTLE IMPACTED. YOU CAN'T MAKE
IT NOT IMPACTED, BUT YOU TRY TO
RESTRAIN THAT. UM THE WORST
THING TO DO IS TO MAKE
DIRECTIONAL BETS ON INTEREST
RATES AND PUT YOUR YOUR BANK AND
YOUR EARNINGS AT RISK BY BEING
WRONG ABOUT WHICH WAY INTEREST
RATES ARE GOING. SO NEXT SLIDE.
SO LOOKING THEIR RISK. IN A
NUTSHELL. THEY HAD VOLATILE
DEPOSITS. AS WE SAID THOSE
TECHNOLOGY DEPOSITS MOVED FAST,
PRIMARILY MATCHED AGAINST
INTEREST RATES. SENSITIVE
SECURITIES UH AND OTHER ASSETS.
SO HIGH RISK DEPOSIT BASE. UH
AND, UM, ASSETS THAT WERE
SIGNIFICANTLY INTEREST RATE
SENSITIVE NEXT. UM AS WE
MENTIONED, THEY PROBABLY HAD
JUST ABOUT THE HIGHEST LEVEL OF
UNINSURED DEPOSITS IN THE
INDUSTRY. IF YOU LOOK DOWN HERE,
YOU KNOW, YOU CAN SEE. UM UH, U
S BANK, FOR EXAMPLE, AT ABOUT
50% UNINSURED DEPOSITS. THAT
WOULD BE TYPICAL FOR A VERY
LARGE COMMERCIAL BANK BECAUSE
UNINSURED DEPOSITS ARE
CHARACTERISTIC OF A BANK THAT
THAT DEALS WITH LARGE CORPORATE
CLIENTS RIGHT BECAUSE MOST OF
THEM HAVE MORE THAN $250,000
INVESTED IN THE BANK. BUT
SILICON VALLEY BANK EVEN IN THAT
CONTEXT WAS AN OUTLIER. YOU CAN
SEE THE NUMBER TWO WAS SIGNATURE
BANK, THE NEW YORK BANK THAT
ALSO FAILED THAT SAME WEEKEND.
UM AND THAT FIRST REPUBLIC BANK,
I'LL NOTE IS SIGNIFICANTLY LOWER
BUT STILL HIGHER THAN THESE
OTHER BANKS. NEXT SLIDE. AND
THEN MOST SIGNIFICANTLY, UM, THE
BALANCE SHEET ASSETS OF SILICON
VALLEY BANK WERE PRIMARILY
SECURITIES. THEY HAD 100
$MILLION BILLION OF SECURITIES,
AS OPPOSED TO $74 BILLION OF
LOANS. NEXT SLIDE. NOW THOSE
SECURITIES, YOU KNOW THE
INTEREST RATE RISK OF A SECURITY
IS LARGELY DEPEND ON DEPENDENT
ON ITS DURATION. OR HOW LONG UM
THE OBLIGATION IS SO A FIVE YEAR
SECURITY AS MUCH MORE, UM,
SUBJECT TO CHANGES IN INTEREST
RATES THAN A THREE MONTH
SECURITY AND SO SILICON VALLEY
BANK, UM HAD A COMBINATION OF A
VERY LARGE SECURITIES PORTFOLIO
AND AN INTEREST RATE RISK
PROFILE, WHICH WAS NOT ADEQUATE
CONTROL. THEY HAD TOO LONG.
ASSETS UH, BEING SUPPORTED BY
LIABILITIES IN THIS CASE
DEPOSITS THAT WERE LIKELY TO BE
HIGHLY VOLATILE. AND YOU SEE ON
THIS CHART THAT THE IMPACT OF
THE UNREALIZED THAT IS TO SAY
THE, UM THE MARKET LOSSES WERE
THEY TOO HAVE TO SELL ALL THEIR
SECURITIES, WHICH NORMALLY WOULD
NOT BE THE CASE. UM YOU CAN SEE
THAT THEIR RISK PROFILE UP HERE
WAS WAY OUT OF LINE WITH THE
REST OF THE BANKING INDUSTRY, SO
THEY HAD THE LARGEST RISK
ASSOCIATED WITH THEIR SECURITIES
PORTFOLIO. NEXT SLIDE. AS I
MENTIONED THERE, THEIR DEPOSITS
STARTED TO TAIL OFF QUITE
SIGNIFICANTLY BY THE END OF 2022
THAT ACCELERATED INTO THE FIRST
QUARTER, SO THEY WERE LOSING
DEPOSITS VERY QUICKLY. UM AND
NEXT SLIDE. WE MOVE INTO, UH,
YOU KNOW WHY? WHAT DID THEY DO
HERE? WELL FIRST, THEY FAILED TO
DIVERSIFY THEIR RISK AWAY FROM
THE TECH EXPOSURE RIGHT? SO THEY
HAD A VERY CONCENTRATED SET OF,
UM, RISKS ASSOCIATED WITH THE
TEST CYCLE, WHICH TECH CYCLE
WHICH SHOULD IN MOST
CIRCUMSTANCES HAVE ALERTED IN
THE FACT THAT THE DEPOSITS
ASSOCIATED WITH THE TECH
BUSINESS WE'RE LIKELY TO BE A
VOLATILE AND, UM LEAVE MORE
QUICKLY THAN A MORE DIVERSIFIED
DEPOSIT BASE. UM SECONDLY, THE
BOARD QUITE NOTICEABLY LACKED
ANY EXPERTISE IN BANK RISK
MANAGEMENT. UM THE SEVEN BOARD
MEMBERS ASSIGNED TO THE RISK
COMMITTEE, ONLY ONE HAD ANY
BACKGROUND EVEN REMOTELY RELATED
TO RISK MANAGEMENT. AND MOST OF
THEM WERE, UM FROM BUSINESSES
THAT DON'T HAVE TO DEAL WITH
THESE TYPES OF RISKS. UM MORE
CONCERNING LEE. IT APPEARS THAT
, UM, MANAGEMENT APPARENTLY
TRIED TO WHAT WE CALL PLAY THE
YIELD CURVE AND WHAT THAT MEANS
IS, YOU KNOW IF WE THINK OF THAT
LONG PERIOD WHEN INTEREST RATES
WERE ZERO UM UH, IT WAS A GOOD
IDEA FROM AN EARNING STANDPOINT
TO HAVE LONGER HIGHER BECAUSE
LONGER SECURITIES TYPICALLY HAVE
A HIGHER INTEREST RATE YOU EARN
MORE ON SECURITIES THAT ARE
LONGER TERM. UM AND THAT WORKS
FINE. AS LONG AS YOU DON'T HAVE
TO SELL THOSE SECURITIES OR, UH
, BUT AND IN A PERIOD THAT LONG
PERIOD OF LOW INTEREST RATES.
THAT WORKS JUST FINE THERE AND
MORE ON THE SECURITIES RIGHT
THEY'D EVER HAD TO REDEEM THEM
SO THEY NEVER TOOK THE MARKET
LOSS RATES CHANGED. UM AND THEY
WERE UNPREPARED FOR RATES MOVING
UP THAT STRATEGY TO BECOME
HIGHLY TOXIC, AND THEY DID NOT
PREPARE IN ANY WAY FOR, UM, THE
PROSPECT THAT RIGHTS WOULD PUT
THEIR SECURITIES PORTFOLIO
DEEPLY UNDERWATER, AND THEY
WOULD AT THE SAME TIME AS THE
DEPOSIT BALANCES WERE DROPPING.
UM, SECOND NEXT PAGE. IN
ADDITION, WE'VE ALL READ THE
REPORTS THEY HAD NO CHIEF RISK
OFFICER FOR MANY CRITICAL MONTHS
AS THIS CRISIS WAS BUILDING UM,
APPARENTLY, THEY ESSENTIALLY
SOLD CRUCIAL INTEREST RATE HEDGE
THEY HAD ON THE SECURITIES
PORTFOLIO, UM TO GENERATE
EARNINGS, PRESUMABLY TO MEET
EARNINGS TARGETS, AND THIS WOULD
HAVE BEEN QUITE UNUSUAL. UM YOU
KNOW, THE REST OF THE BANKING
INDUSTRY HAS HEDGED THEIR
SECURITIES PORTFOLIOS.
APPARENTLY, A DECISION WAS MADE
HERE TO TAKE THE EDGE OFF. THAT
TYPICALLY WOULD MEAN THAT THEY
BELIEVED THAT RIGHTS WERE GOING
TO DROP. AND OF COURSE, AS I
MENTIONED, IT'S NOT A GOOD IDEA
TO MAKE BETS ON WHETHER RIGHTS
ARE GOING TO DROP OR NOT, AND IT
LOOKS LIKE THEY DID. UM
APPARENTLY, THEY REPLACED THE
LIQUIDITY RISK MODEL, WHICH
WOULD HAVE WARNED THEM ABOUT, UM
, THE POSSIBILITY THAT. AH
DEPOSIT DROPS WOULD PUT THE
SECURITIES PORTFOLIO IN TROUBLE
WHEN IT GAVE AN ANSWER THEY
DIDN'T LIKE AND CHANGED INTO A
NEW MODEL THAT I ONLY KNOW FROM
PRESS REPORTS. UM AND THEY
CLEARLY WERE NOT PREPARED FOR
LIQUIDITY RUN AS THEY AGAIN FROM
PRESS REPORTING HAD AN EXTREMELY
DIFFICULT TIME PLEDGING
SECURITIES TO THE FEDERAL
RESERVE UNDER THE EMERGENCY
TILAK FACILITY THAT WAS PUT IN
PLACE AND TO THE FEDERAL HOME
LOAN BANK AND JUST WERE UNABLE
TO DEAL WITH THE EXTENT OF THE
RISK. AND I GUESS MY LAST
SPECULATION IS THAT THEY YOU
KNOW, THEY LIVED ON OPIUM, THE
THINGS WE'RE GOING TO BE OKAY.
THEY WOULD, UH YOU KNOW, RIGHTS
WOULD COME DOWN. IT WOULD ALL
WORK OUT. NO ONE WOULD DO THAT.
AND YOU KNOW, 90 99 TIMES OUT OF
100. THAT PROBABLY IS WHAT
HAPPENS, BUT EVERY ONCE IN A
WHILE IT DOESN'T AND IN THE
BANKING INDUSTRY, YOU HAVE TO
PREPARE FOR THAT FOR THAT
CIRCUMSTANCE. UM NEXT SLIDE. SO
BACK TO, UH, TIMING AND
MESSAGING. UM APPARENTLY,
MOODY'S INVESTOR SERVICES WAS
GOING TO DOWN GRADE THEIR DEBT
AND DEPOSIT RATINGS BECAUSE OF
THIS RISK, WHICH BY THE WAY, WAS
FULLY DISCLOSED IN THE 10-K AND
BANK ANALYSTS SAW THE EXTENT OF
THE MISMATCH BETWEEN ASSETS
LIABILITIES. UM AND AS A RESULT
OF THE BANK HIRED GOLDMAN SACHS,
UM AND GORDON CAME UP WITH THE
IDEA OF SELLING A LARGE PORTION
, ACTUALLY A RELATIVELY SMALL
PORTION. BUT THE MOST VOLATILE
PORTION OF THE SECURITIES
PORTFOLIO AND AT THE SAME TIME
RAISING CAPITAL TO COVER THE
LOSS. UM TWO THINGS WENT WRONG
WITH THAT ONE. I'LL TALK ABOUT
IN A MINUTE THAT HAD TO DO WITH
SILVER GATE BANK AND THE OTHER
WAS THAT, UM YOU KNOW, IT WAS
PROBABLY TOO LITTLE. AH TOO
SMALL A SOLUTION WHEN YOU HAVE A
$75 BILLION SECURITIES PORTFOLIO
PROBLEM, OR $100 BILLION
SECURITY SUPPORT PORTFOLIO
PROBLEMS SELLING TWO BILLION
DOESN'T REALLY SOLVE IT. UM NEXT
PAGE AS THE CHAIRMAN MENTIONED A
SILVER GATE, UM, PLAYED A ROLE
HERE BECAUSE THE SILVER GATE
BANK FAILURE HAPPENED JUST AT
THE SAME TIME AS UM SILICON
VALLEY ANNOUNCED THAT IT WAS
GOING TO SELL, UH, CAPITAL
UNCOMMITTED. BY THE WAY, IT WAS
A PLAN TO SELL CAPITAL, NOT AN
ACTUAL SALE CAPITAL AND SELL
SECURITIES. UM SILVER GATE.
SILVER GATES COLLAPSE
ESSENTIALLY FORCED ATTENTION ON
THE SAME PROBLEM BECAUSE SILVER
GETS PROBLEM WAS AN EXAGGERATED
VERSION OF SILICON VALLEY'S
PROBLEM. IT HAD ALL OF ITS
DEPOSITS WERE WITH, UM CRYPTO
COMPANIES. THE CRYPTO CRASH LED
THOSE DEPOSITS TO LEAVE THE BANK
VERY RAPIDLY. THE BANK HAD A
SECURITIES PORTFOLIO THAT I
THOUGHT WAS ADEQUATE TO DEAL
WITH THAT TURNED OUT IT WASN'T
IT WAS TOO LONG AGAIN AND AS A
RESULT OF THE VALLEY SORRY,
SILVER GATE WENT OUT OF
BUSINESS, AND THAT FOCUSED
EVERYONE'S ATTENTION ON OTHER
BANKS THAT HAD THAT ISSUE AND IN
PARTICULARLY SILICON VALLEY BANK
NEXT YEAH, THIS IS JUST A THING
THAT SHOWS YOU WHAT HAPPENED
WITH SILVER GATE BANKS. DEPOSITS
GREW VERY RAPIDLY DURING THE
CRYPTO BOOM AND FELL OFF. SO
SOMETHING SIMILAR WAS HAPPENING
AT SILICON VALLEY BANK NEXT AND
AS THE CHAIRMAN ALSO MENTIONED,
UM SOMETHING NEW HAPPENED. $42
BILLION. YOU, UH, WITH
WITHDRAWALS THAT YOU MENTIONED
ON THAT ONE DAY WAS ABOUT WELL,
THE STATISTIC I USE WHEN
WASHINGTON MUTUAL FELL IN 2008
DURING EIGHT, THE LAST EIGHT
BUSINESS DAYS THEY LOST A TOTAL
OF $18 BILLION OF DEPOSITS. AND
THAT WAS A BANK THAT WAS LARGER
THAN SILICON VALLEY BANK. SO
THERE'S $42 BILLION NUMBER WAS
HUGE PLUS AS CHAIRMAN AS UM, FED
MEMBER BAR SAID THERE WERE $100
BILLION MORE GETTING READY TO
COME OUT THE NEXT DAY, SO THE
SIZE AND SPEED OF THIS WAS
UNPRECEDENTED AND HAD SOMETHING
TO DO WITH THE MAKEUP OF THIS
LITTLE VALLEY BANK DEPOSIT
PORTFOLIO ALL UNINSURED. ALL IN
A VERY TIGHT KNIT INDUSTRY,
WHERE INFORMATION PASSED QUICKLY
BUT ALSO DUE TO THE FACT THAT TO
MOVE YOUR MONEY ALL YOU NEED TO
DO IS PICK UP YOUR CELLPHONE AND
MAKE A NÓI DO SOMETHING ON YOUR
APP. VERY DIFFERENT FROM OUR
VISION OF A BACK RUN FROM IT'S A
WONDERFUL LIFE OR PICTURES OF
THE THIRTIES WHERE PEOPLE ARE,
YOU KNOW, STANDING IN THE LOBBY
AND YELLING. YOU DON'T NEED TO
DO THAT ANYMORE, SO AND IT CAN
MOVE VERY, VERY FAST. NEXT PAGE.
AND I POINT OUT FOR THOSE WHO
ARE CRITICAL THAT BACKGROUNDS
ARE FORMED. WHAT WE CALL THE
PRISONER'S DILEMMA. UM YOU KNOW,
IT'S NEVER A GOOD IDEA FOR
ANYONE TO START A BANK RUN, BUT
ONCE BACKGROUND STARTS, YOU
REALLY HAVE TO PARTICIPATE IN
IT. OR ELSE YOU'RE GOING TO BE
LEFT HOLDING THE BAG. NEXT. SO
ALL THESE THINGS CAME TOGETHER
ON THE LEFT THAT WE DISCUSSED
AND WHAT HAPPENED WAS THE WORST
BANK RUN IN U. S HISTORY WITH
THAT $42 BILLION, LEAVING IN AN
AFTERNOON 100 BILLION HEADED OUT
THE DOOR. UM THEY WERE UNABLE TO
SECURE LIQUIDITY FROM THE FED,
UH, AND THE F H L BE SUFFICIENT
TO PAY OFF DEPOSITS AND THEY
WERE SEIZED BY THE F D I C AT
THE REQUEST OF THE DEPARTMENT OF
FINANCIAL PROTECTION AND
INNOVATION. NEXT SLIDE. WHAT
HAPPENED NEXT? WELL,
SHAREHOLDERS WERE EFFECTIVELY
WIPED OUT. I SHOULD POINT OUT
THAT THE HOLDING COMPANY
SHAREHOLDERS STILL HAVE AN
INTEREST IN A COUPLE OF
SUBSIDIARIES, AND THERE'S GOING
TO BE A DISPUTE WITH THE F D I C
OVER WHO GETS THOSE, UM, THE
INITIALLY THE INSURED DEPOSITORS
WERE FULLY PROTECTED THE
UNINSURED. NOT NOW, LOOK, THINK
OF OUR SLIDE. THAT MEANS 6% OF
THE DEPOSITORS WERE PROTECTED
AND EVERYONE ELSE WAS NOT UM,
THEY THEY USED THE TYPE OF
RECEIVERSHIP WHICH ASSUMES THAT
THEY'RE GOING TO LIQUIDATE
RATHER THAN SELL THE WHOLE BANK.
UM AND THE FBI SEES
COMMUNICATIONS, IN MY VIEW WERE
VERY POOR. THEY WERE ACCURATE.
IN TERMS OF THE LEGALITIES, BUT
THEY DID NOT MAKE CLEAR THAT
ABOUT A THIRD OF THE UNINSURED
DEPOSITS WERE GOING TO BE
DISTRIBUTED AS SOON AS THE NEXT
MONDAY. UM AND I THINK IT WAS A
FAIRLY BUREAUCRATIC STATEMENT
THAT DID NOT DO MUCH TO COME,
AND CONCERNS OF DEPOSITORS AND
OTHERS AND OTHER AND OTHER
BANKS, SO THERE WAS A LOT OF
CONFUSION OVER THE WEEKEND.
THERE WAS TALK OF SELLING THE
FRANCHISE, RESULTING PARTS OF
THE FRANCHISE THAT DIDN'T
HAPPEN. NEXT SLIDE. AND BY THE
NEXT DAY, THE CONTAGION RUN WAS
HAPPENING ON ON BASICALLY ALL
REGIONAL BANKS THAT HAD HIGH
LEVELS OF INSURED DEPOSITS. MANY
OF THEM WERE IN CALIFORNIA FIRST
REPUBLIC. PACIFIC WESTERN. UM
SILICON VALLEY. I'M SORRY I
MENTIONED SIGNATURE BANK FAILED
OVER THE SAME WEEKEND WESTERN
ALLIANCE SCIENCE ALL SUFFERED
SIGNIFICANT DEPOSIT RUNS NEXT
SIDE. AND THEN WE SAW THE
MASSIVE, UH, EFFECTS THAT A TRUE
FAILURE OF SILICON VALLEY BANK
WOULD HAVE ON CALIFORNIA BECAUSE
OF ITS CRITICAL ROLE IN THE
TECHNOLOGY INDUSTRY AND GREAT
CONCERN ABOUT HOW VARIETY OF, UM
COS WE'RE GOING TO BE PAYROLL
AND WHAT THE IMPACT WOULD BE ON
THE STATE. NEXT SLIDE. PREACHING
TO THE CHOIR HERE, BUT
CALIFORNIA UM YOU KNOW,
DOMINATES IN TECH AND RELIES
VERY MUCH ON TAXOL. JUST MOVE ON
. UM SO THINGS WERE NOT GOING
WELL. OTHER BANKS WERE BEING
THREATENED AND THE PROCEDURE WAS
FOLLOWED BY THE TREASURY
DEPARTMENT. THE FEDERAL RESERVE
THE F D I. C. UM WHICH CALLED
FOR, UM, WHAT'S KNOWN AS A
SYSTEMIC RISK RISK SECTOR
EXCEPTION, WHICH IS AN
EXTRAORDINARY ACTION TAKEN TO
ALLOW THE F D I C TO DO MORE
THAN JUST PAY OFF INSURED
DEPOSITS, AND SO THE CONCLUSION
WAS REACHED WITH RESPECT TO BOTH
SILICON VALLEY BANK SIGNATURE
THAT THIS WAS A SYSTEMIC RISK
MOMENT. AND THAT THE F D I C
WOULD IN FACT GUARANTEE ALL
DEPOSITS AND SET UP WHAT ARE
KNOWN AS BRIDGE BANKS TO MARKET
THE FRANCHISES IN ORDERLY WAY
THE BANKS STOPPED STARTED NORMAL
OPERATIONS AGAIN ON MONDAY, THE
HOLDING COMPANY'S DECLARED
BANKRUPTCY. UM AND THEN
ULTIMATELY NEXT SLIDE. UM THE
FRANCHISE WAS SOLD TO AN OPERA
COMPANY OUT OF THE MIDWEST
CALLED FOR CITIZENS BANK SHARES
. THE ASSETS AND LIABILITIES
WERE TRANSFERRED NEXT SLIDE. I
WON'T GO THROUGH THE DETAILS OF
HOW THIS IS DONE, BUT BASICALLY
ALL OF THE ASSETS, LOAN ASSETS
AND SECURITIES AND ALL OF THE
RELEVANT LIABILITIES WERE
TRANSFERRED AT THE AT IN A
EXTREMELY LARGE COST TO THE F D
I C ABOUT $20 BILLION IS THE
ESTIMATE THAT WOULD BE THE
LARGEST FAILURE AND HISTORY OUR
LARGEST COST FAILURE IN HISTORY.
UM, NEXT SLIDE. NEXT SLIDE. ONE
MORE. YEAH. OKAY, SO WHAT ARE
THE QUESTIONS THAT WE DON'T KNOW
? YOU KNOW, UM, OBVIOUSLY WHAT?
WHAT DID MANAGEMENT THERE KNOW?
AND WHEN DID THEY KNOW IT? THERE
ARE MANY INDICATIONS THAT OUT
OUTSIDE RISK ADVISORS HAD
ADVISED THEM TO DO THINGS THAT
THEY CHOSE NOT TO DO. UM HOW
WERE THEY THINKING ABOUT THE
EXPECTED GROWTH AND SHRINKAGE OF
THE COMPANY AND THE TECH CYCLE?
UM WHAT WAS GOING ON WITH THAT
SECURITIES? HEDGE UM, REVERSAL,
THE CHANGE IN THE RISK MODELS
AND NOT HAVING A CHIEF RISK
OFFICER, UM, AT THE SAME TIME AS
THEY WERE, YOU KNOW, SCHEDULED
INSIDER SALES, SO ALL THAT
REQUIRES LOOKING INTO WHAT DID
THE BOARD NO. AND WHEN ONE THING
THAT'S VERY SIGNIFICANT IS THE
RISK COMMITTEE HAD 18 MEETINGS
DURING 2022? THAT'S VERY, VERY
UNUSUAL. YOU WOULD THINK MAYBE
SIX IF THAT, SO THE RISK
COMMITTEE WAS DEEPLY INVOLVED IN
SOMETHING PROBABLY IN RESPONDING
TO THE REGULATORY ACTIONS THAT
THE FED AND THE FBI WERE TAKING
AT THAT TIME. AH WHAT THE
REGULATORS KNOW THE REGULATORS
HAVE INDICATED, AND TESTIMONY SO
FAR THAT THEY INTENSIFIED
SUPERVISION VERY ACTIVELY IN
2022 CITED THE BANK WITH WHAT
ARE KNOWN AS CAMERAS AND M R I A
S MATTERS REQUIRING ATTENTION
AND MATTERS REQUIRING IMMEDIATE
ATTENTION. UM YOU KNOW THE
QUESTION EVERYONE SEEMS TO ASK
IS SHOULD THEY HAVE DONE MORE
SHOULD THEY HAVE ORDERED CHANGE
THAT THEY DID NOT? UM AND YOU
KNOW WE'LL BE LEARNING MORE
ABOUT THAT WHEN THE FED DOES ITS
REPORT, AND WHEN THE FBI DOES
ITS REPORT TO KNOW WHAT WAS
DONE, AND WHAT WASN'T UM,
CLEARLY, UM, YOU KNOW THE
THINKING AROUND THE MOODY'S
DOWNGRADE AND THE CAPITAL RAISE
IS WORTH LOOKING AT. UM IT WAS
VERY, UM YOU KNOW, A VERY
UNSUCCESSFUL STRATEGY. UM AND
THEN THERE'LL BE SOME DISCUSSION
ABOUT WHETHER ANY OF THE HOLDING
COMPANY ASSETS END UP FOR THE
BENEFIT OF THE BANK. LAST THING
POLICY ISSUES. UM SO IT'S RAISED
A NUMBER OF ISSUES OF STARTING
WITH HOW SHOULD MANAGEMENT BE
TREATED? GIVEN THESE RISK
MANAGEMENT FAILURES, THERE ARE
PROVISIONS THAT ALLOW FOR SO
CALLED CLAWBACKS, WHICH IS
PULLING BACK COMPENSATION THAT'S
PREVIOUSLY BEEN GRANTED. UM
SHOULD SHOULD INDIVIDUALS BE
BANNED FROM FURTHER INVOLVEMENT
IN THE INDUSTRY. THAT'S ANOTHER
POWER THAT THE REGULATORS HAVE,
UM, HERE'S ONE THAT I THINK, UM
THE STATE COULD ACTUALLY DO
SOMETHING MEANINGFUL ON IS
SHOULD BANK BOARDS WOULD BE
REQUIRED TO HAVE EXPERT MEMBERS.
AS I MENTIONED THE SILICON
VALLEY RISK COMMITTEE AND THE
BOARD OF GENERAL HAD VERY FEW
PEOPLE WITH ANY BANKING
EXPERIENCE, AND CALIFORNIA COULD
CERTAINLY CHANGE THIS
REQUIREMENT. FOR AT LEAST IT'S
LARGER REGULATED BANKS. UM THE
FUNDAMENTAL QUESTION IS DO THE
REGULATORS HAVE THE RIGHT
POWERS, OR THEY COULD HAVE COULD
THEY HAVE USED THEIR EXISTING
POWERS MORE EFFECTIVELY? HIS NEW
LEGISLATION REQUIRED OR IS JUST
EMPOWERMENT OF THE REGULATORS TO
USE POWERS THEY ALREADY HAVE.
AND AGAIN, WE'LL LEARN MORE
ABOUT THAT WHEN WE LEARNED WHAT
WAS ACTUALLY DONE DURING THOSE
DAYS, AND THEN, UM THE WHOLE
QUESTION OF SYSTEMIC RISK NEEDS
TO BE RETHOUGHT BECAUSE THE
PRIOR VIEW OF WHAT INSTITUTIONS
COULD CAUSE SYSTEMIC RISK WAS
THE VERY BIGGEST ONES TOO BIG TO
FAIL, SO CALLED G SIPS. THE BANK
OF AMERICA'S THE JPMORGAN'S THE
CITIBANK'S WELL, THIS IS A MUCH
SMALLER BANK AND YET BECAUSE OF
ITS IMPACT ON IT PARTICULARLY
CRITICAL INDUSTRY FOR THE
COUNTRY. UM IT'S FAILURE CAUSED
A SYSTEMIC EVENT. AND SO WE MAY
NEED TO THINK MUCH MORE
CAREFULLY ABOUT WHICH BANKS ARE
SYSTEMIC AND TO THE POINT THAT
THE CHAIRMAN MADE ABOUT CHANGES
THAT WERE MADE TO THE REGULATORY
STRUCTURE. UM MAYBE WE NEED TO
IMPOSE THE SAME REQUIREMENTS ON
THOSE SMALLER BUT STILL
SYSTEMICALLY IMPORTANT BANKS
THAT WE IMPOSE ON THE LARGER
BANKS, AND I THINK THAT WILL BE
A SOURCE OF MAJOR DISCUSSION AT
THE FEDERAL LEVEL. UM AND THEN,
UM, UH, YOU KNOW, VERY
SPECIFICALLY ON THE QUESTION OF
LIQUIDITY. DO WE NEED TO THINK
ABOUT, UM THE QUESTION THAT, UM
I THINK MICHELLE WILL TALK ABOUT
WHICH IS, UH, THESE THIS BANK
WAS WELL CAPITALIZED CAPITAL WAS
NOT THE ISSUE. AND MOST OF OUR
REGULATION FOCUS VERY HEAVILY ON
CAPITOL. WE DO HAVE LIQUIDITY
REQUIREMENTS, BUT THEY WOULD NOT
APPARENTLY HAVE CAPTURED THIS
RISK EVEN HAD THE LIQUIDITY
REQUIREMENTS APPLIED. THE BANK
PROBABLY STILL WOULD HAVE MET
THEM BECAUSE THE LIQUIDITY
REQUIREMENTS AGAIN ARE TIED TO
MODELS, WHICH ASSUME HOW FAST
DEPOSITS ARE GOING TO LEAVE. AND
UM, YOU KNOW, VALUATION CHANGES
AND SECURITIES PORTFOLIOS. AND
SO AS LEAST AS FAR AS THE
RESEARCH I'VE SEEN FROM YALE SO
FAR, IT APPEARS THAT SILICON
VALLEY BANK WOULD NOT HAVE BEEN
CITED FOR FAILURE TO MEET THOSE
REQUIREMENTS. REQUIREMENTS NEED
TO BE LOOKED AT AGAIN. OKAY, SO
THAT'S THE END OF MY THING HERE
WHEN YOU'RE READY, I CAN TALK
ABOUT FIRST REPUBLIC BANK. MAYBE
YOU WANT TO GO FIRST AND FINISH
THE SILICON VALLEY THING. MR
BAKER. THANK YOU FOR YOUR
PRESENTATION. VERY INSIGHTFUL,
AND WE DO HAVE MEMBERS THAT ARE
PRESENT HERE WITH US. I THINK AT
THIS TIME WE WILL MOVE TO OUR
NEXT PRESENTER AND THEN OPEN IT
UP FOR MEMBERS TO BE ABLE TO
MAKE COMMENTS AND ASK QUESTIONS
AT THE VERY END. SO WITH THAT WE
HAVE WITH US, UM MISS MICHELLE,
A PARTNER AT CLARA'S GROUP, A
STRATEGIC ADVISORY AND
INVESTMENT FIRM. MISS HOLT IS A
REGULATORY PROFESSIONAL AND
ATTORNEY WITH BOTH PRIVATE AND
PUBLIC SECTOR EXPERIENCE,
INCLUDING AS A SENIOR LEGAL
OFFICIAL IN THE OFFICE OF THE
COMPTROLLER OF CURRENCY. SO WITH
THAT WE WOULD LIKE TO HEAR YOUR
PRESENTATION AND INSIDE AS WELL.
THANK YOU VERY MUCH FOR HAVING
ME TO YOU AND GRAYSON AND
MEMBERS. UM WHAT I'D LIKE TO
START WITH IS TO REALLY
EMPHASIZE THAT THE SBB FAILURE.
IT'S REALLY A PARADOX RIGHT?
BECAUSE IT'S INCREDIBLY SHOCKING
THAT THIS SPEED WITH WHICH IT
FAILED. THE ENORMITY. UM BUT THE
COST OF ITS FAILURE. UM. DEEP
PROFOUND RISK MANAGEMENT, UM,
FAILURES THAT ARE BECOMING
OBVIOUS THAT IS ALL VERY
SHOCKING, BUT AT THE SAME TIME
AS TODD JUST WALKED YOU THROUGH
. THERE WERE MANY PREDICTABLE.
UM WELL, THIS WAS THE
PREDICTABLE OUTCOME, AND IT WAS
WELL KNOWN WHAT THE RISKS WERE
RIGHT. SO NOW WE'RE ON TO KIND
OF THE FUN PART, WHICH IS THE
SEARCH FOR THE GUILTY RIGHT?
THAT INEVITABLY HAPPENS, UM,
AFTER A FAILURE, AND I'M I'M
KIDDING. OF COURSE IT ISN'T FUN
. BUT THERE WILL BE, UM. UM NOT
JUST A SEARCH FOR A GUILTY BUT A
MAD SCRAMBLE, UM, FOR THE EXITS
, RIGHT? UH IT WAS HIS FAULT. IT
WAS THEIR FAULT. IT WAS RIGHT,
SO LET'S JUST START WITH A
LITTLE BIT OF A LEVEL SET AS TO
WHO DOES WHAT? BEFORE WE SAY WHO
DID? WHAT WRONG, OKAY, SO I'M
JUST GONNA GIVE YOU A QUICK
OVERVIEW OF THE DUAL BANKING
SYSTEM AND PLEASE FORGIVE THE
ONE. OH, ONE IF YOU'D LIKE ME TO
RUN RUN PASTOR IS FINE, MAN. THE
NEXT SLIDE, PLEASE. OKAY I
SHOULD JUST SOME DISCLAIMERS. I
AM NOT SPEAKING WITH ANY INSIDE
KNOWLEDGE ABOUT SVB AND THOSE
ARE MY OWN VIEWS. UH TODAY,
ALRIGHT. NEXT SLIDE, PLEASE.
ALRIGHT SO THE DUAL BANKING
SYSTEM IT'S A PARALLEL SYSTEM.
RIGHT? UM AND I WILL SAY IT'S
UNUSUAL. I THINK PROBABLY, UM,
THE ONLY EXAMPLE AS FAR AS I
KNOW IN THE WORLD THAT WE HAVE
BOTH THE FEDERAL AND STATE
BANKING SYSTEM. WE HAVE AN
EXTRAORDINARILY COMPLEX AS YOU
KNOW, FINANCIAL REGULATORY
SYSTEM. UM AND WE HAVE A SYSTEM
BOTH STATE AND FEDERAL BANKS, AS
YOU ALL KNOW, SBB STATE
CHARTERED. UM SO THE THING TO
REMEMBER ABOUT THE DIFFERENCE
BETWEEN A STATE BANK IS
EXCEPTIONALLY A FEDERALLY
CHARTERED BANK, WHICH WOULD BE
THE NATIONAL BANK IS
CHARACTERIZED BY ITS NATIONAL
CHARTER. AND OVERSIGHT BY
FEDERAL SUPERVISORS. A STATE
BANK IS CHARACTERIZED BY A STATE
CHARTER BUT SUPERVISION BY BOTH
THE STATE AND FEDERAL
SUPERVISORS. AND THAT'S THE
THING TO KEEP IN MIND. THAT'S
TRULY THE PARALLEL DUAL BANKING
SYSTEM WE'RE TALKING ABOUT. UM,
WE HAVE THE NEXT SLIDE, PLEASE.
ALRIGHT. SO. THIS IS THE DUAL
BANKING SYSTEM AS I MENTIONED ON
THE LEFT SIDE OR NATIONAL BANKS,
THE FEDERALLY OVERSEEN NATIONAL
BANKS. UH THE SUPERVISOR IS THE
OC SEE MY ALMA MATER AS IT WERE.
UM THE ZERO CC DOES NOT TAKE
KINDLY TO ANY KIND OF INTRUSIONS
OR ATTEMPTED INTRUSIONS BY
STATES, UH, IN THE AFFAIRS OF
NATIONAL BANKS, BUT THAT'S
ANOTHER STORY AND AN OLD STORY.
STATE BANKS THERE TWO TYPES,
STATE MEMBER AND STATE NON
MEMBER BANKS, RIGHT. SO WHEN WE
SPEAK OF MEMBER, WE'RE TALKING
MEMBERSHIP IN THE FEDERAL
RESERVE SYSTEM. RIGHT SO A STATE
MEMBER BANK LIKE SVB AND SILVER
GATE. IS REGULATED IN CALIFORNIA
BY THE FBI AND THE FRB. DUAL
REGULATION THERE A STATE
NONMEMBER BANK, RIGHT? UM LIKE
FIRST REPUBLIC WILL BE REGULATED
, UH BY THE FBI AND THE F D I C
SO I CAN TELL YOU THAT THE F D I
C IS THANK YOU LUCKY STARS THAT
SPB WAS A FEDERALLY, UH,
FEDERALLY REGULATED, UH, BANK.
NEXT SLIDE, PLEASE. ALRIGHT
QUICK, QUICK NOTE ON BANK
HOLDING COMPANY REGULATIONS. SO,
UH, TODD, YOU MENTIONED THE ROLE
OF THE SHAREHOLDERS AND, UH,
SILICON VALLEY FINANCIAL, THE
HOLDING COMPANY OF SBB, SO THE
FED REGULATES BANK HOLDING
COMPANIES LIKE SILICON VALLEY
FINANCIAL RIGHT? THE IT'S JUST
IT'S OFTEN. OFTENTIMES A BANK
HOLDING COMPANY IS JUST A SHELL.
UNDER WHICH SITS ONE OR MORE
SUBSIDIARIES, INCLUDING A BANK
SUBSIDIARY. ONE OR MORE SUBSIDY
BANK SUBSIDIARIES THE BANK
HOLDING COMPANY ITSELF DOES NOT
OFFER BANKING SERVICES THEY DO
SO THROUGH THEIR SUBSIDIARY
BANKS. SO IN THIS CASE, IT WOULD
HAVE BEEN SILICON VALLEY
FINANCIAL ON TOP, AND THE SUB
WOULD HAVE BEEN SVB. SIMPLE.
OKAY, NEXT SLIDE. PLEASE.
ALRIGHT I WON'T READ THIS TO
YOU. WHAT I WILL SAY IS THAT THE
D F P. I RIGHTLY, UH, NOTES THAT
IT HAS, UM, UNDERSTANDING WITH
BOTH THE FRB AND THE F D I C BY
WHICH THEY SHARE. SUPERVISORY
OVERSIGHT OF STATE BANKS OF
CALIFORNIA STATE BANKS. THEY
HAVE COOPERATIVE AGREEMENTS
AROUND THE EXAMINATION CYCLE FOR
THESE BANKS, UM AND, UM GOOD,
POSITIVE WORKING RELATIONSHIPS.
THE NEXT SLIDE, PLEASE. ALL
RIGHT. I THINK WHAT YOU SHOULD
LOOK AT IS THE LAST BULLET HAIR
. GENERALLY FEDERAL REGULATORS
WILL CONSULT. WITH THE STATE
BANKING SUPERVISOR AS TO
REMEDIES, RIGHT? THAT'S THAT'S A
LITTLE BIT DIFFERENT, RIGHT?
THAT'S THAT'S SIGNALING, UM
FRANKLY, THAT THE D F P I IN
THIS CASE, UM AND THIS QUOTE IS
NOT IN THE CONTEXT OF BEST TV.
BUT UM, IS THAT, UH, THE T F P
A. D F P. I IS NOT IN THE
DRIVER'S SEAT WHEN IT COMES TO
FASHIONING REMEDIES LIKE THIS.
IT'S THE JUNIOR PARTNER. YOU
MIGHT SAY YOU MIGHT SAY THAT.
ALL RIGHT. NEXT SLIDE, PLEASE.
ALRIGHT SO HERE'S WHAT I WANT
WHEN YOU'RE THINKING ABOUT, YOU
KNOW WHO WAS RESPONSIBLE, RIGHT
? AND A LOT OF QUESTIONS WILL BE
WHAT DID THE D F P I KNOW WHEN
DID IT KNOW IT RIGHT? SO WHEN IT
COMES TO THE DUAL BANKING
SYSTEM, ONE OF THE DIFFICULTIES
THAT STATE BANKING SUPERVISORS
FACE NOT JUST D F P I WRITE IS
THEY HAVE A BROADER MISSION AND
JURISDICTION THAN THE FEDERAL
BANKING AGENCIES. THE FEDERAL
BANKING AGENCIES SUPERVISED
BANKS RIGHT FOR THE MOST PART.
AND NOTHING ELSE. THE D F P I
AND OTHER STATE BANKING
REGULATORS ARE ALSO RESPONSIBLE
FOR THE NON BANK FINANCIAL
SERVICES PROVIDERS IN THE STATE
. IT CAN. THEY CAN RANGE FROM
PAWNSHOPS TO FUNERAL HOMES, TOO.
SOPHISTICATED FINTECH. THEY. ARE
RESPONSIBLE FOR QUITE A BROAD
SWATH OF FINANCIAL SERVICES
PROVIDERS, AND THAT'S A BIG
PLATE THAT THEY HAVE. UM AT THE
D F P I, AS YOU CAN SEE HERE HAS
HAS MORE THAN 20 DIFFERENT TYPES
OF LICENSES FOR WHICH IT IS
RESPONSIBLE, RIGHT? COMPARED TO
THE FED IN SAN FRANCISCO, WHICH
WOULD HAVE BEEN THE PRIMARY
SUPERVISOR OF SVB RIGHT. THE SAN
FRANCISCO FED HAS CHILDREN MORE
EMPLOYEES THAN THE D F P I AND
REMEMBER ONLY FOCUSED ON BANKS.
RIGHT NONE OF THE NON BANKS
RIGHT AND THEY HAVE THE ABILITY
TO DRAW ON RESOURCES FROM OTHER
FEDERAL RESERVE BANKS WITHIN THE
FEDERAL RESERVE SYSTEM AND FROM
UH D C HEADQUARTERS, SO THEY
HAVE SIGNIFICANTLY LARGER
RESOURCES BOTH IN TERMS OF
FUNDING AND PEOPLE THAN THE DAY
OF P. I THIS PROVIDES THE
FEDERAL REGULATORS WITH
SIGNIFICANT, UM ADVANTAGES WHEN
DEALING WITH COMPLEX BANKING
INSTITUTIONS. UM A STATE BANKING
SUPERVISOR SUCH AS THE D F P. I
IS GOING TO BE CHALLENGED AND
ITS ABILITY TO SUPERVISE A BANK
LIKE SVB IS AS TIRED NOTED THAT
HAS, UM, OPERATIONS IN MULTIPLE
STATES RIGHT OR HAS VERY
SPECIALIZED BUSINESS MODELS LIKE
SILVER GATE, RIGHT. THE FBI IS
JUST SPREAD A LITTLE BIT
THINNER. UM AND SO. THE TODD
CALLED THEM THE JUNIOR PARTNER
THAT THE FBI BUT YES, THE YOU
MIGHT CONSIDER THE FEDERAL
BANKING AGENCIES AS THE SENIOR
PARTNER IN THAT RELATIONSHIP.
WHEN IT COMES TO COMPLEX, MULTI
STATE BANKING ORGANIZATIONS. SO
I DON'T SAY ALL OF THIS TO, UM,
JUDGE WHO THE FINGERS SHOULD BE
POINTED AT I SAY IT TO PROVIDE
CONTEXT, RIGHT? SO WHEN YOU SAY
WHAT DID THE D F P I KNOW. WELL
DID THEY KNOW IT FIRSTHAND WHERE
THEY GETTING IT FROM THE FED AND
WHAT KIND OF HOW TIMELY RIGHT.
WHEN WAS THIS? WHEN WAS THIS
SITUATION APPARENT TO THEM?
THAT'S THE SORT OF THING I WOULD
BE ASKING, RIGHT? AND WHEN
THINKING ABOUT THE SORTS OF, UM
PROBLEMS THAT TODD NOTED TOWARDS
THE END OF HIS, UM, PRESENTATION
. ONE WAS REALLY JUST A
COMPLETE, UM DEBACLE WHEN IT
CAME TO MESSAGING BY THE
REGULATORS AROUND, UM UH, THE
SVB FAILURE. I AM SURE. ALL OF
YOU HERE GOT LOTS OF CALLS OVER
THE WEEKEND THAT SVB FAILED,
RIGHT? I DID. RIGHT ABSOLUTE
PANIC. I'VE NEVER SEEN REALLY
ANYTHING LIKE IT RIGHT? AND THAT
WAS ATTRIBUTABLE TO TWO THINGS.
RIGHT WHAT S VBS CEO ON
WEDNESDAY, SAYING, DON'T PANIC,
RIGHT? THAT'S WHICH IS ALWAYS A
SIGN. YOU SHOULD PANIC IF
SOMEBODY SAYS DON'T PANIC A YEAR
IN BED, THE SHAPE AND THE F D I
C SAYING WE'LL LET YOU KNOW. YOU
KNOW, WE'RE WERE CONCERNED AND
WE'LL WE'LL WE'LL WE'RE TRYING
TO FIGURE THIS OUT. VERY
UNSETTLING. FURTHER OVER THE
WEEKEND. A LOT OF THE CALLS I
GOT, AND WE CAN GO DOWN THIS
RABBIT HOLE IN A FEW MINUTES AND
I'M NOT GONNA SPEND TOO MUCH
TIME ON THIS, BUT UM SPB HAD A
NUMBER OF ACCOUNT HOLDERS LARGE
FINTECH COMPANIES THAT HELD
ENORMOUS DEPOSITS. IN FBO
ACCOUNTS FOR THE BENEFIT OF
ACCOUNTS SO UM S¼. I HEARD FROM
FROM PARTICULAR PARTICULAR
COMPANY THAT THAT WE HAVE 400
MILLION IN AN FBI ACCOUNT. ALL
OF WHICH FOR PASSED THROUGH
INSURANCE. WHAT THAT MEANS IS
THAT THEY HAD A BIG OMNIBUS
ACCOUNT WITH MANY, MANY, MANY
ACCOUNT HOLDERS. YOU KNOW,
UNDERNEATH IT RIGHT, ALL OF
WHICH HAD LESS THAN 250,000,
RIGHT. SO THEY WERE LIKE, WE'RE
SURE THAT IT SHOULD BE ENSURED.
BUT THE F D I C WON'T TELL US
WON'T CONFIRM THAT AND WON'T
TELL US WHAT DATA THEY NEED.
WHERE TO SEND IT. YOU KNOW, AND
HOW SOON THEY WILL SORT THIS OUT
SO THIS PROBLEM BECAME, UH, IT
WAS ELIMINATED WHEN THE F D I C
AND THE FED SAID OKAY, WE'RE
GONNA EVERYTHING'S GONNA BE
COVERED. WE'RE GOING TO BE
LIQUIDITY FACILITY. IT'S ALL
GOING TO BE FINE. BUT THERE WAS
SUCH BUNGLED MESSAGING AND I
THINK THAT, UM THE D F P. I UM
UH, COULD SIGNIFICANTLY HELP, UM
IN COORDINATING AND GETTING THE
MESSAGE OUT TO THE CITIZENS OF
CALIFORNIA IF ANOTHER SUCH, UM,
ADVANTAGE TRANSPIRED. UM, NEXT
SLIDE, PLEASE. OKAY SO I STOLE
THIS ONE FROM TITLE PROBABLY
LOOK FAMILIAR, BUT I WANT TO
JUST TOUCH ON ONE THING THAT
THAT WE HAVEN'T GOTTEN TO, UM
AND IT'S ANOTHER ROLE THAT D F P
I CAN PLAY HERE. UM SO THIS VERY
QUICKLY IS WHAT FIRST CITIZENS
WOUND UP WITH RIGHT? SO OKAY,
THE BUT THE BANK, ESSENTIALLY
BUT YOU KNOW WHAT THEY DIDN'T
BUY NEXT SLIDE. THE SVB
COMMUNITY BENEFITS PLAN. I DON'T
KNOW IF YOU'RE FAMILIAR WITH
THIS. THIS IS, UM, AN $11
BILLION COMMITMENT ON THE PART
OF SVB TO FIND SMALL BUSINESS
LOANS, COMMUNITY DEVELOPMENT
LOANS RESIDENTIAL MORTGAGES TO
MAKE DONATIONS, NINE BILLION, OF
WHICH WAS SLATED FOR CALIFORNIA.
RIGHT? AND THIS WAS HAILED AS A
GREAT SUCCESS. THIS THIS PLAN
WHEN IT WAS RELEASED, UM GOSH,
JUST IN 22 IT WAS ASSOCIATED
WITH THEY BOUGHT AN OPERATION
CALLED BOSTON PRIVATE BANK, AND
THIS WAS PART OF THE NEGOTIATION
WITH COMMUNITY GROUPS AT THE
TIME. SO WHAT HAPPENS WELL,
FIRST CITIZENS SINS MADE NO
COMMITMENT. WITH REGARD TO THE
SBB COMMUNITY BENEFITS PLAN,
REMEMBER FOR CITIZENS IS NOT
LOCATED IN CALIFORNIA. THEY MAY
NOT BE SUPER KEEN ON COMMITTING
NINE BILLION, UH TO CALIFORNIA.
I'M I DON'T HAVE ANY INSIDE
KNOWLEDGE OF THIS, BUT YOU KNOW
THEY MIGHT BE THINKING. MAYBE
NOT. UM. AND FOR CITIZENS IS NOT
IN THE SAME FINANCIAL POSITION
AS SBB WAS AT THE TIME SBB MADE
THAT COMMITMENT, RIGHT AS TODD
MENTIONED, UM AND HIS REMARKS
RIGHT ALL BY THE TIME SPV FAILED
FROM A PRIOR HIGH OF 174 BILLION
IN DEPOSITS. UM IT WAS LESS THAN
50 57 BILLION, RIGHT SO THAT $11
BILLION COMMITMENT, UM LOOKS A
LOT HARDER TO SWALLOW WHEN YOU
BUILD THE GUT 57 BILLION UM, AND
DEPOSITS. SO THAT SAID, RIGHT?
UM I THINK THAT FIRST CITIZENS
IS LIKELY TO NEGOTIATE AT LEAST
SOME SORT OF PARTIAL COMPLIANCE
OR RENEGOTIATE. AH, THAT
COMMITMENT. UM I THINK THAT'S
THE SORT OF THING THAT IS
PERFECT FOR THE D F P I TO HAVE
A HAVE A SAY IN IN A ROLE IN UM
, BUT I KNOW THAT WILL BE THE
NEXT. UM ISSUE OF GREAT CONCERN
TO MANY IN CALIFORNIA, BUT WITH
THAT, UM, I'M HAPPY TO EXPAND
THE DISCUSSION OR TAKE
QUESTIONS. THANK YOU VERY, VERY
MUCH, MISS HOLT FOR THAT
PRESENTATION, VERY INSIGHTFUL,
ESPECIALLY WHEN IT CAME TO BEING
ABLE TO DISTINGUISH THE ROLES
THAT EACH AGENCY HAS AND THE
TYPES OF BANKS THAT ACTUALLY
EXIST, AND ESPECIALLY HERE ON
THE STATE LEVEL. WHAT OUR ROLE
WILL BE MOVING FORWARD WHERE WE
UNDERSTAND OUR PARAMETERS AND
WHERE WERE EFFECTIVE AND WHAT WE
CAN DO AS FAR AS GIVING
DIRECTION, EVEN LEGISLATION AND
POLICY TO A REGULATORY BODY LIKE
THE FBI, AND SO FOR US TODAY,
THIS IS REALLY ACCOMPLISHING
WHAT WE WERE LOOKING FOR IN THIS
SESSION, AND THAT IS TO LEARN
WHAT SHOULD WE BE LOOKING FOR?
WHAT SHOULD WE BE LISTENING FOR?
AND WHEN THESE REPORTS COME OUT
, WHAT SHOULD WE BE LOOKING TO
GLEAN AND ACTUALLY LAUNCH INTO
SOME POLICY MAKING IF THAT'S
NECESSARY OR GIVING DIRECTION TO
OUR REGULATORY BODY TO BE ABLE
TO EITHER FIT THEM WITH MORE
TOOLS, OR TO EMPOWER THEM TO USE
TOOLS THAT THEY MAY HAVE ALREADY
HAD. RIGHT AND I'D LIKE TO
EMPHASIZE UM YOU KNOW KIDDING
ASIDE WHEN I WENT HOTTER, I SAY
JUNIOR PARTNER. THAT DOESN'T NOT
MEAN THAT THE STATE'S INTEREST
NO JUNIOR RIGHT. THERE'S EVERY
REASON FOR THE STATE. TO HAVE
UNEQUAL. UM SEAT AT THE TABLE
WHEN IT COMES TO UNDERSTANDING,
UM, THE CONDITION OF THE BANKS
AND ITS STATE RIGHT AND THE
IMPACT THAT THAT CONDITION MIGHT
HAVE ON ITS CITIZENS. SO UM,
CERTAINLY I WOULD BE. I WOULD
RECOMMEND THAT YOU REALLY LOOK
INTO WHAT INFORMATION WAS
AVAILABLE, AND WHEN YOU KNOW TO
THE D F B. I ALSO EMPHASIZE THE
POINT I MADE EARLIER THAT THIS
BANK WENT FROM BEING A
RELATIVELY, YOU KNOW, NOT SMALL
BUT NOT LARGE BANK TO A VERY
LARGE BANK OVER A VERY SHORT
PERIOD OF TIME, AND EVEN AT THE
FEDERAL RESERVE, THEY WERE
BEHIND THE BALL AND REALIZING
THIS, THEY JUST MOVED IT INTO
THE LARGER BANK CATEGORY FOR
THEIR OWN INTERNAL WORK BECAUSE
AGAIN THE FED WILL SPEND LESS
TIME WITH SMALLER BANKS. THE FBI
WILL SPEND MORE AND THAT TENDS
TO REVERSE WHEN THEY GET LARGER.
AND SO, UM, YOU KNOW THIS WAS A
FAST MOVING TARGET. THANK YOU
VERY MUCH, MR BAKER, AND WE DO
HAVE MEMBERS OF THE COMMITTEE
HERE WOULD BE MORE THAN WELCOME
TO ENTERTAIN YOUR COMMENTS. AND
THEN ALSO ANY QUESTIONS YOU
MIGHT HAVE. THANK YOU CHAIR AND
EXCELLENT PRESENTATIONS.
ASSEMBLYMEMBER'S DIXON, PLEASE.
WHERE DO WE BEGIN? BUT YOU UM,
HAVE STARTED TO DEFINE THE
BOUNDARIES HERE AND WHAT WE CAN
OR CANNOT DO. I MEAN, ALL I KNOW
IS NOT WHAT YOU'VE PRESENTED IN
THEN JUST READING IN THE PUBLIC
PAPERS TO COMMENTS IN YOUR
PRESENTATION. SO YOU MENTIONED
THAT I MEAN, WE ALL WERE
WATCHING THE INTEREST RATE
SITUATION WITH THE FEDERAL
RESERVE AND WATCHING HIM SLOWLY
EAT UP THERE. THAT WAS OVER,
MAYBE A 6 TO 9 OR 12 MONTH
PERIOD. SO EVEN THAT UM, PERIOD
OF AWARENESS IS SURPRISING TO ME
THAT BOTH AGENCIES WERE NOT UM,
FOCUSED ON THAT BECAUSE IT
WASN'T LIKE IT HAPPENED
OVERNIGHT. IT WAS HAPPENING WITH
SOME CONSISTENCY AND THE WELL
RUN BANKS WERE, UM, SPENDING
MORE TIME TRYING TO PROTECT
THEMSELVES FROM THAT, AND THIS
BANK WAS CLEARLY AN OUTLIER THAT
BECAME OF EVIDENT TO ALL OF US
WHEN THEY FILE THEIR 10-K, AND
THE SIZE OF THIS PROBLEM WAS
EVIDENT, BUT THE REGULATORS
WOULD HAVE SEEN IT CONSIDERABLY
EARLIER. THE YOU KNOW, THERE'S A
BIT OF A GENERATIONAL PROBLEM
HERE BECAUSE THERE'S A WHOLE
GENERATION OF BANKERS HAVE NEVER
SEEN INTEREST RATES ABOVE
EFFECTIVELY. ZERO SO, UM, YOU
KNOW, THAT CAN GIVE YOU A SMALL
AMOUNT OF JUSTIFICATION, BUT
BASICALLY, UM, IF WE LOOK AT
THEM COMPARED TO THE ACTIVITIES
OF OTHER SIMILARLY SITUATED
BANKS THERE AN OUTLIER ONE THAT
ONE OTHER QUESTION JUST IF I MAY
BEFORE YOU ASK YOUR QUESTION,
I'M GOING TO STEP OUT AND GO TO
ANOTHER COMMITTEE REAL QUICK.
MISS DIXON, PLEASE CONTINUE ON.
AND IF YOU WANT TO ASK SOME
QUESTIONS, I WILL BE RIGHT BACK.
OKAY UM, ONE OF YOUR MORE WELL.
THEY WERE ALL SUBSTANTIAL
OBSERVATIONS WITH TWO THINGS ON
IN TERMS OF THE COMPOSITION OF
THE BANK'S MANAGEMENT. THEY DID
NOT HAVE A RISK OFFICER FOR A
LONG PERIOD OF TIME, AND I THINK
I READ THAT THE CEO OR THE
PRESIDENT WAS PERFORMING IN THAT
FUNCTION, AND HE DID NOT HAVE
ANY EXPERIENCE IN THAT REGARD,
AND THEN ALSO THE COMPOSITION OF
THE BOARD OF DIRECTORS. AH WHAT
WOULDN'T THAT HAVE BEEN
DEFICIENCY THAT ONE OF THE TWO
REGULATORY AGENCIES WOULD HAVE
FLAGGED. THEY CERTAINLY WOULD
HAVE THEIR THERE. THAT MAKES ME
THINK OF TWO THINGS. UM MISS
DIXON, UM TYPICALLY, REGULATORS
EXPECT I THREE LINES OF DEFENSE
RISK MANAGEMENT FRAMEWORK AT A
LARGE INSTITUTION. AND IN THE
SECOND LINE BEING, THE RISK
FUNCTION SHOULD BE INDEPENDENT
OF THE BUSINESS FUNCTION RIGHT
SHOULD HAVE SHOULD PROVIDE
INDEPENDENT ASSURANCE OF THE
MANAGEMENT OF THE RISK OF THE
BUSINESS FUNCTIONS. SO WHEN YOU
WHEN YOU DO HAVE THE CEO IF
THAT'S THE CASE, I DON'T KNOW
THIS BUT IF YOU HAVE THE CEO
RUNNING RISK THAT'S GONNA RAISE
UH, CONCERNS? UM CERTAINLY A
BANK OF THAT SIZE WOULD BE
EXPECTED TO HAVE A C R O ON
DUTY. WELL SO JUST BIGGS. AND
NEXT QUESTION SINCE THEY DIDN'T
IS THIS SOMETHING THAT COULD BE
? UH ONE OF A LONG LIST OF
REGULATORY ENHANCEMENTS OR
REVISIONS? WELL YES, I MEAN, BUT
AGAIN, IT'S UH UM IT WOULD HAVE
BEEN AN EXPECTATION THAT THEY
HAVE A CRL. THE QUESTION IS, WHY
WAS IT ALLOWED TO GO ALONG ALONG
? AS FOR SO LONG, WITHOUT ONE
AND THE YOU KNOW, THE POINT YOU
MADE AROUND THE BOARD IS ALSO I
THINK SIGNIFICANT, UM, FOR
INSTANCE, AUDIT COMMITTEES ARE
REQUIRED TO BE CHAIRED BY
SOMEONE WITH AUDIT. AUDITING
RESPONSIBILITY, RIGHT RISK
COMMITTEES SHOULD IN FACT
CONTAIN MEMBERS WHO HAVE
PROFESSIONAL EXPERIENCE,
MANAGING RISKS AND FINANCIAL
INSTITUTION. THAT IS NOT A
STATUTORY REQUIREMENT. IT IS
SOMETHING THAT CALIFORNIA COULD
IMPOSE ON STATE BANKS OF A
CERTAIN SIZE. UM AND I THINK IT
WOULD BE GOOD PRACTICE AND
PROBABLY MOST BACK. REGULATORS
WOULD EXPECT TO SEE THAT, BUT UM
AND I WOULDN'T BE SURPRISED IF
IN THE M R A S AND M R I A S.
THERE WERE CONCERNS RAISED.
ABOUT UM UH, THE LACK OF A C, R
O OR SOME BLURRING IN THE THREE
LINES OF DEFENSE. I DON'T KNOW
IF THERE WERE THAT'S
CONFIDENTIAL, UM, SUPERVISORY
INFORMATION, BUT IT WOULDN'T
SURPRISE ME AGAIN. I WOULD BE
CURIOUS TO KNOW. UM WHAT THE D F
P. I KNEW YOU KNOW, WHEN DO YOU
KNOW? WHAT DO THEY KNOW WHO
KNEW? AND WHEN DID THEY KNOW IT?
ALL RIGHT. MR FONG, DIDN'T YOU
HAVE ANY QUESTIONS? THANK YOU SO
MUCH, MADAM CHAIR AND THANK YOU
SO MUCH TO BOTH OUR PRESENTERS
FOR BUS PRESENTATION. SUPER
INSIGHTFUL. CAN'T TOUCH UPON IT
EARLIER, BUT I WANT TO DO SOME
FOLLOW UP ON THE FEDERAL RESERVE
AND THE FBI. UM WE KNOW THAT IN
2021, THE FEDERAL RESERVE FOUND
SERIOUS WEAKNESSES AND HOW THE
BANNOCK WAS HANDLING CHIEF OF
KEY RISK. THEN YOU MENTIONED THE
CR. OH, WHY DON'T THEY HAVE ONE?
BUT WHY DIDN'T THE FEDERAL
RESERVE OR D F P I WHO SHARED
SUPERVISION OF THE SVB? STEP IN
AFTER ISSUE MAKES SIX CITATIONS
AND SECOND QUESTION WOULD BE
ONCE A CERTAIN NUMBER OF
CITATIONS HAVE BEEN ISSUED TO
THE FEDERAL RESERVE OR THE FP
STEP IN TO RESOLVE THOSE ISSUES
OCCURRING OCCURRING WITHIN THE
BANK. THOSE ARE EXCELLENT
QUESTIONS. UH, MR PONG. THERE
ISN'T A MAGIC NUMBER, UH, OF M R
A S OR M R I A IS BEFORE YOU
KNOW, LIKE AN ALARM BELT RINGS,
CERTAINLY, THOUGH, UM. THE RANGE
OF ENFORCEMENT ACTIONS.
INCREASES RIGHT FROM FROM
CONFIDENTIAL. YOU KNOW? JUST YOU
REALLY NEED TO FIX THIS. TO
PUBLIC, UM AH ENFORCEMENT
ACTIONS THAT MIGHT INCLUDE CEASE
AND DESIST OR CIVIL MONEY.
PENALTIES UM, I'M NOT AWARE THAT
THERE WERE ANY SUCH UM UH,
ENFORCEMENT ACTIONS AND IN FACT
AGAIN WHEN I SAY THAT S VIEW
YOUR SHOCKING THE FAILURE.
INCREDIBLY SHOCKING, I WOULD SAY
UNPRECEDENTED. FOR A BANK THAT
HAS NO PENDING PUBLIC
ENFORCEMENT ACTIONS TO FAIL. YOU
KNOW THAT? THAT IS REALLY
UNUSUAL, RIGHT? SO AGAIN TO YOUR
POINT. WHAT WAS GOING ON? I
DON'T KNOW. AND UM, MICHELLE'S
ENTIRELY CORRECT ON THAT, UM,
THERE'S A PARADIGM ISSUE HERE A
LITTLE BIT BECAUSE, UM, YOU
KNOW, PEOPLE ARE ALWAYS FIGHTING
THE LAST WAR. AND THE LAST WAR
IN 2008 WAS ABOUT CAPITAL AND
CREDIT RISK. UM AND AS A RESULT
, AS CAPITAL WAS DECLINING BANKS
WERE ISSUED REGULATORY ORDERS TO
RAISE CAPITAL OR DID YOU TAKE
OTHER ACTIONS IN THIS CASE
CREDIT WAS NOT AN ISSUE AT ALL.
IT WAS ENTIRELY THIS OTHER BEAST
. UM YEAH INTEREST RATE RISK.
AND YOU KNOW, I HAVE THE SENSE
THAT UM UH THE LACK OF IMMEDIACY
OF INTEREST RATE RISK BECAUSE
INTEREST RATE RISK IF YOU'RE
HOLDING IF THAT SECURITIES BOOK
I TOLD YOU IF THERE HADN'T BEEN
A RUN ON THE BANK, RIGHT? IT
WOULD ALL HAVE ENDED UP JUST
FINE. THOSE SECURITIES WOULD
HAVE PAID OFF WHEN THEY WERE
MATURED. EVERYONE WE GOT CUT
THEIR MONEY. UH CREDIT RISK WILL
TAKE DOWN A BANK ON ITS OWN
INTEREST RATE RISK REQUIRES AN
OUTSIDE EVENT OR CIRCUMSTANCE
THAT CAUSES THE INTEREST RATE
RISK TO BE CRYSTALLIZED TO
LOSSES. OTHERWISE, IT DOESN'T
HAPPEN SO THERE'S A CERTAIN
RESPECT IN WHICH I HONESTLY
THINK, UM, EVERYONE IN THE
INDUSTRY, UH, KIND OF FORGOT
ABOUT INTERESTING RISK. UM AND
THIS IS SOMETHING I I'VE BEEN
HARPING ON. PAY ATTENTION TO HOW
OFTEN YOU HEAR STATEMENTS,
PARTICULARLY AT THE FEDERAL
LEVEL THAT OUR BANKS ARE WELL
CAPITALIZED. RIGHT. WELL SO IS
SVB, RIGHT AND OTHER FACTORS AND
THAT TOOK TWO TO TODD'S POINT
RIGHT THAT THAT CAPITAL WELL
CAPITALIZED DOESN'T TELL THE
WHOLE STORY, RIGHT? THE CHAIR IS
BACKED. WE'VE BEEN GOING BACK
AND FORTH ASKING QUESTIONS SO
VERY ANSWER BOTH QUESTIONS. UM
THANK YOU SO MUCH FOR THAT
INSIDE. REALLY APPRECIATE IT.
REMEMBER FUNK. GO FOR IT. THANK
YOU, MR GRAYSON. I ASKED A
COUPLE QUESTIONS. I REALLY
APPRECIATE THAT RESPONSE IS BACK
AND THANK YOU SO MUCH FOR THIS
INSIGHTFUL PRESENTATION. TAKE MR
CHAIR. SIMILAR MEMBERS. SORRY I
JUST HAVE ONE. UM QUICK QUESTION
. SO IF D F P I WANTED TO MORE
ASSERTIVELY DEMAND CHANGES IN
THE RISK MANAGEMENT PRACTICES AS
YOU GUYS MENTIONED RIGHT? THAT
WAS ONE OF THE FACTORS THAT WAS
NOTED AS UM, AS AN ISSUE. WHAT
TYPE OF AUTHORITY DOES DO THEY
HAVE? SINCE THEY'RE THE
CHARTERING AUTHORITY AND THANK
YOU. UM. I DON'T KNOW THE ANSWER
TO THAT QUESTION. UM, I
APOLOGIZE. THE BUT TYPICALLY IT
WOULD NOT BE THE CHARTERING
PROVISIONS. THAT WOULD UM UH,
PROVIDE THE NECESSARILY THE
SUPERVISORY AUTHORITY THAT
YOU'RE TALKING ABOUT. AND SO THE
SUPERVISORY THE ENFORCEMENT
ACTIONS THAT WE JUST DISCUSSED
THE RANGE WITH WITH MR FONG.
THOSE ARE FOUND AT, UH, IN
FEDERAL LAW. UM DO YOU HAVE ANY
PARALLEL STATE LAWS IN
CALIFORNIA AROUND SAFETY AND
SOUNDNESS? THERE'S A LESS ROBUST
REGULATORY SCHEME. A LOT OF THE
FEDERAL LAW HAS BEEN TURNED INTO
DETAILED REGULATIONS. UM THAT'S
LESS COMMON AT THE STATE LEVEL.
UM BUT THERE'S GENERALLY A
RESIDUAL AUTHORITY, UM, TO THE
EXTENT THAT VIOLATIONS ARE
IDENTIFIED. UM TO, UM, YOU KNOW,
TAKE MORE AGGRESSIVE ACTION.
IT'S VERY, VERY RARELY DONE. UH
IT TENDS TO BE BACK REGULATION
OVER A LONG PERIOD OF TIME HAS
GOTTEN HEAVILY PROCEDURAL IST,
SO IT'S TYPICALLY UM, SOME YOU
KNOW WHAT WE CALL WRITING YOU UP
LIKE A MARA OR AN M R I A. AND
THEN THERE IS, UM, AN ASSESSMENT
ABOUT WHETHER THE PERSON HAS THE
BANK HAS SATISFIED THOSE THINGS
. AND THERE MIGHT BE AN
ADDITIONAL CRITICISM IF THEY
HADN'T. UM, AND THEN EVENTUALLY
IT LEADS TO EITHER IN AGREEMENT.
A WRITTEN AGREEMENT OR IN THE
WORST CASES EASTERN DESIST
ORDER, BUT THEY RARELY USE THEIR
SORT OF PLENARY AUTHORITY TO TRY
TO FORCE ACTION WITHOUT GOING
THROUGH ALL THOSE STEPS, AND
THAT TENDS TO BE VERY
COUNTERPRODUCTIVE IN A IN AN
EMERGENCY ENVIRONMENT. AND IF I
MAY, I JUST ASK YOU TO ENGAGE IN
A THOUGHT. EXPERIMENT. RIGHT,
SVB. WELL CAPITALIZED.
PROFITABLE. GROWING FAST.
DARLING OF THE VENTURE CAPITAL
COMMUNITY. BELOVED BY ITS
FINTECH DEPOSITORS. A WEEK
BEFORE IT FAILED. IF THE D F P I
HAD TRIED TO INDEPENDENTLY. COME
DOWN ON THE BANK. YOU WOULD HAVE
GOTTEN A LOT OF CALLS, RIGHT? UH
UM YOU KNOW, AND THEY'RE I'M NOT
SAYING IT WOULD HAVE BEEN
APPROPRIATE. BUT IT WOULD HAVE
BEEN PUSHED BACK. YOU MEAN OH,
YEAH. UM AGAIN BECAUSE THE BANK
WASN'T SUBJECT TO ANY PUBLIC
ACTIONS BY ALL OUTSIDE
APPEARANCES WAS REALLY VERY
FINANCIALLY SOUND. SO IT'S YOU
KNOW, THEY'RE THEY'RE IN A
DIFFICULT POSITION. MEMBER DIXON
JUST KIND OF HAVE ONE FOLLOW UP
QUESTION TO CLARIFY IN MY MIND
YOU TALKED ABOUT THE DUAL SYSTEM
IS THIS TYPICAL AND ALL STATES
OR CALIFORNIA STATE STATE STATE
IS THAT POTENTIAL AREA FOR US TO
LOOK AT AND IS THERE REDUNDANCY
OR THE BOTH FEDERAL RESERVE AND
THE DEPARTED INSURANCE BOARD AND
THE D WHATEVER THEY'RE CALLED D
F P I DEFINITION OF US.
FINANCIAL REGULATION HAS
REDUNDANCY. BUT BECAUSE THERE
ARE ARE CROSSOVER UM, BREED
CONFUSION AND MISUNDERSTANDING.
GOODNESS, YES, BUT THIS IS AS I
MENTIONED. IT'S BEEN IN PLACE
FOR 200 YEARS AND UM, THE
SUBJECT OF FREQUENT BATTLES. UM
JURISDICTIONAL. UH SPATS. UM THE
COMPLEXITY OF OUR SYSTEM IN THE
US IS, AS I SAID, SORT OF AN, UH
, UNPARALLELED IN A AND THE
COUNTRY AND WE NEVER SEEM TO
SOLVE THAT. UH UM THE IT'S
BECAUSE NOBODY WANTS GIVEN
JURISDICTION WANTS TO GIVE IT UP
. UM AND ONCE AGENCIES LIKE I
MEAN, FOR EXAMPLE, THE SEC HAS
BEEN AROUND SINCE IT WAS CREATED
UNDER LINCOLN. YOU KNOW, UM AND
EVERY TIME THERE'S A BIG CRISIS
THERE'S TALK ABOUT SHOULD WE
SIMPLIFY THE SYSTEM AND I DON'T
KNOW ABOUT YOU, BUT THE LAST
CRISIS WE WOUND UP WITH ANOTHER
REGULATOR, YOU KNOW? SO UM, NO
ONE WANTS TO GIVE IT UP. EXACTLY
OKAY, ACTUALLY, AS A GENERAL
MATTER, STATE FEDERAL BANK.
SUPERVISION HAS WORKED FINE,
LARGELY BECAUSE, UM, INTERESTS
ARE ALIGNED. THEY'RE YOU KNOW,
THEY'RE NO LONGER IS, UM YOU
KNOW THE TYPE OF REGIONAL
INTEREST THAT YOU MIGHT HAVE HAD
WITH AN AGRICULTURAL BANK IN
IOWA? NOT WANTING, YOU KNOW,
WALL STREETERS MESSING WITH IT.
THINGS YOU KNOW, BANKING
REGULATION IS FAIRLY
STANDARDIZED AT BOTH STATE AND
FEDERAL LEVELS, SO USUALLY
COOPERATION WORKS EFFECTIVELY.
WE ONLY THINK ABOUT IT WHEN
SOMETHING GOES WRONG, AND IT'S
WORTH THINKING ABOUT IT. AND SO
FAR AS YOU WANT TO MAKE SURE
THAT THE STATE IS UH,
APPROPRIATELY PROTECTING
INTERESTS OF STATE RESIDENTS. UM
AND I THINK THAT'S WILL LEARN A
LOT FROM THE INVESTIGATIONS,
BOTH AT THE FED AND THE DFT
ABOUT WHETHER THIS COOPERATION
WAS REALLY WORKING AND WHETHER
THE FBI WAS GETTING INFORMATION
AND NEEDED TO BE AS EFFECTIVE AS
IT COULD BE. OKAY. I JUST HAVE
ONE OTHER FINAL QUESTION RELATED
TO RISK WHICH I TALKED ABOUT
EARLIER. BUT AS I UNDERSTAND IT,
UM OKAY? WHEN THEY WENT ALL THE
DEPOSITORS WERE MADE EQUAL IF I
UNDERSTAND THAT CORRECTLY WHICH
MEANS THERE'S NO MORE RISK FOR A
BANK. THEY'RE GOING TO ALWAYS BE
BAILED OUT OR ALWAYS BE COVERED.
THEIR DEPOSITORS WILL BE COVERED
AND RISK MANAGEMENT IS SO
FUNDAMENTAL TO ANY ORGANIZATION
. SO IF YOU TAKE THE RISK OUT,
WHAT ARE WE DOING? UM SO I
SHOULD. ONE POINT OF
CLARIFICATION IS AND NO ONE HAS
ANNOUNCED THAT HENCEFORTH, ALL
DEPOSITS IN THE SYSTEM WILL BE
INSURED, BUT IT'S A REASONABLE
ENOUGH, HMM. PRESIDENT TO ASSUME
WOULD BE CITED IN A FUTURE. YEAH
YOU WEREN'T DEPOSITORS MAY BEGIN
TO RELY ON IT. YEAH UM, SO THAT
IS THAT IS DEFINITELY A
FREQUENTLY CITED SORT OF COUNTER
IF YOU TAKE THE RISK OF WAY. UM
WHAT'S TO STOP THE BANKERS FROM
REALLY SWINGING FOR THE FENCES,
RIGHT? AND UM I WOULD SAY THERE
ARE ALL SORTS OF RULES IN PLACE
THAT GOVERN THEIR BEHAVIOR AND
REQUIRE EFFECTIVE RISK
MANAGEMENT. I THINK THAT, UM,
BOOKS WILL BE WRITTEN AND MOVIES
WILL BE MADE ABOUT WHY THOSE
MEASURES IN THIS CASE DIDN'T
WORK. UM BUT I. I WELCOME YOU
TO. I THINK THAT'S THAT'S RIGHT.
I MEAN, THE IN MY ACADEMIC ROLE
. UM YOU KNOW THIS PARTICULAR
TOPIC AS OF INTENSE FASCINATION
TO THE BACK, REGULATORY AND
ACADEMIC WORLD. UM VERY
DIFFERING VIEWS AS TO WHETHER
INCREASED DEPOSIT INSURANCE OR
WHAT'S KNOWN AS MORAL HAZARD,
WHICH IS THE IDEA THAT PEOPLE
SHOULD MONITOR. UM UNINSURED
AMOUNTS THEY HAVE IN BANKS. IT'S
RATHER IMPRACTICAL FOR PEOPLE TO
DO THAT, BUT THE THEORY IS THAT
THEY SHOULD BE DOING THAT. YEAH
BECAUSE I THINK, UM, MISS DIXON
, YOU'RE ASKING AND I GET IT.
YOU'RE ASKING LIKE, WELL, GOSH.
IF THERE'S NO LIMIT TO DEPOSIT
INSURANCE, WHAT'S TO KIND OF
CONTROL THE BAD BEHAVIOR OF THE
BANKS. THE MORAL HAZARD ARGUMENT
, IT PUTS THE BURDEN ON THE
INDIVIDUAL DEPOSITOR. TO SAY,
WHERE'S MY MONEY BEING
EFFECTIVELY MANAGED. A PROBLEM
WITH THAT RIGHT? IS THAT THE
INDIVIDUAL DEPOSITOR REALLY
DOESN'T HAVE ACCESS TO THE
INFORMATION THEY WOULD NEED TO
MAKE AN INFORMED JUDGMENT. YOU
KNOW, JUST SEEING LIKE COLOR
REPORTS ARE PUBLIC, BUT MOST
DEPOSITORS WOULDN'T KNOW HOW TO
READ ONE OR WHAT TO MAKE OF IT
AND WHERE TO FIND IT. ARE REALLY
WHAT IT'S TELLING THEM. SO YOU
KNOW, YOUR POINT IS WELL TAKEN.
YOU KNOW, IF YOU LOOK AT THE
POINT MICHELLE MADE EARLIER THIS
WAS A WELL CAPITALIZED BANK
STOCK MARKET LOVED IT. IT WAS
VERY POPULAR. YOU KNOW HOW MUCH
DO WE REALLY EXPECT PEOPLE TO
MONITOR THAT? IT'S A HARD
QUESTION. IF I COULD PUT A
LITTLE PLUG IN, I WOULD ALSO,
UM, BE THINKING ABOUT UM. THE
INCENTIVES FOR THE EXECUTIVES.
YES, RIGHT. SO WHAT'S TO STOP
THEM? RIGHT WHAT'S TO STOP THEM
FROM SWINGING FROM THE FENCES?
PAY ATTENTION TO HOW THEY'RE
PAID. NOT HOW MUCH BUT HOW.
RIGHT SO WHAT? WHAT PORTION IS
AN INCENTIVE? WHAT DOES THEIR
ARRANGEMENT REQUIRE? IN TERMS OF
VESTING DEFERRAL? YOU KNOW? WHAT
ARE THE MEASURES AGAINST WHICH
THEIR PERFORMANCE WILL BE
ASSESSED? IS IT ALL REWARD? OR
IS IT ALSO RISK MANAGEMENT
PERFORMANCE? FOR EXAMPLE, IT
WOULD BE VERY COMMON TO
COMPENSATE AND EXECUTIVE IN
ANOTHER INDUSTRY AND GROWTH. UM
AND BACKING GROWTH CAN BE HIGHLY
DANGEROUS OR EFFECTIVELY
MANAGED, UH, MAXIMIZING
SHAREHOLDER RETURN. WELL TO THE
EXTENT THAT YOU'RE DOING THAT,
AT THE COST OF TAKING RISKS IN
THE SHORT TERM, UM YOU KNOW,
THAT MIGHT BE MORE CHALLENGING.
SO WE'VE SET UP A SYSTEM YOU
KNOW WHERE WE HAVE A STANDARD
CAPITALIST INCENTIVES FOR THE
EXECUTIVES OF ORGANIZATIONS
WHERE THERE WHERE SOCIETY IS
ACTUALLY COVERING THE DOWNSIDE.
AND SO, UM, IT ONE NEEDS TO LOOK
AT COMPENSATION AND IN THIS TYPE
OF INDUSTRY DIFFERENTLY THAN YOU
WOULD LOOK AT A COMPANY IN THE
YOU KNOW, MILK PRODUCTION
BUSINESS. THANK YOU VERY MUCH,
WHICH IS ALSO A DIFFERENT WAY OF
LOOKING AT, UH, HOW WE ADDRESS
CONSUMER PROTECTIONS. CORRECT
YOU KNOW, BUT NORMALLY IT'S YOUR
BOTTOM THINKING OF THE CONSUMER.
BUT GOING TO THE TOP AND LOOKING
DOWNWARD AS WELL AND PROVIDING
THOSE PROTECTIONS BECAUSE
INCENTIVES WORK THE SAME WAY,
YOU KNOW, UH AROUND CONSUMER
PRODUCTS, WHICH IS IT'S POSSIBLE
THAT A BANKING PRODUCT IS HIGHLY
PROFITABLE AND YET QUITE
DAMAGING TO CUSTOMERS. CORRECT I
THINK ONE OF THE BIGGEST, UH OR
ONE OF THE BIG ISSUES THAT WILL
BE DEALING WITH HERE IN IN
SACRAMENTO WHEN IT COMES TO SVB
S FAILURE. IS WHAT IT DOES MEAN
ABOUT OR IN IN REFERENCE TO OUR
STATE CHARTER, AND ARE THERE
CHANGES THAT NEED TO BE MADE TO
THE CHARTER IN ADDRESSING
COMPETITIVENESS, AND ALSO IF
MAYBE NOT. SPEAKING SPECIFICALLY
TO S P V. S V B ITSELF, BUT ARE
THERE APPROPRIATE? UH,
THRESHOLDS OR MARKERS TO WHERE
IT'S NO LONGER APPROPRIATE TO BE
A STATE CHARTER OR SOMETHING OF
THAT OF THAT SET. I DON'T DO WE
EXPLORE SOMETHING LIKE THAT. OR
IS THAT SOMETHING THAT IS UH,
ALREADY, UH, IN A GOOD PLACE.
WELL UM, I THINK THAT THERE HAS
ALWAYS BEEN, UM, GREAT VALUE
PROVIDED IN, UH, THE STATE
CHARTER. UM I THINK, UM, BUT
WHAT THERE ARE LOTS OF WAYS YOU
COULD LOOK AT HOW COMPLEX UH, UM
UH, AND INSTITUTION UNDER ANY
CHARTER WOULD BE AND THEREFORE
WHAT SORT OF SUPERVISION REGIME
. IT SHOULD BE SUBJECT TO, RIGHT
. THAT'S VERY COMMON. FOR
EXAMPLE, WITH REGARD TO VERY
LARGE INSTITUTIONS, THE G SIBS,
RIGHT THEY ARE. WOW. ARE THEY
REGULATED RIGHT? AH UM AH. SO
YOU KNOW, THERE MAY BE A
DISCUSSION. AS YOU SAID ABOUT
THRESHOLDS. I YOU KNOW, I WOULD
LEAVE THAT OBVIOUSLY TO YOUR
WISDOM, BUT THAT'S A THAT'S
CERTAINLY SOMETHING YOU COULD
CONSIDER YORK, FOR EXAMPLE,
WHICH FOR A LONG TIME HAD VERY
LARGE WALL STREET AND FOREIGN
BANKS, UM, SUPERVISED IN NEW
YORK HAS ACTUALLY DONE QUITE
GOOD JOB OF DOING THAT. BUT THEY
FOCUSED RESOURCES ON IT, AND IN
MANY WAYS THE LEAD REGULATORS
FOR SOME OF THE INSTITUTIONS IN
A WAY THAT WOULD BE SURPRISING
AND OTHER CIRCUMSTANCES. THAT'S
PARTICULARLY WITH FOREIGN BANKS,
WHO TEND TO BASE THEIR U. S
OPERATIONS IN NEW YORK. IN YOUR
ESTIMATION. WE DO HEAR ABOUT, UH
, THE NEED FOR THE STATE
CHARTER, WHICH I JUST HEARD FROM
YOU AGAIN. WE DO HEAR ABOUT
THAT. BUT WE ALSO HEAR ABOUT
PROMOTING BANK INNOVATION. DO
YOU SEE THAT? ACTUALLY IN
PRACTICE? YES I'M GLAD YOU ASKED
THAT. YOU KNOW, I THINK IT'S
REALLY INTERESTING THAT THE D F
P. I CHANGED ITS NAME TO D F P I
RIGHT TO REALLY EMPHASIZE THE
ROLE. THAT IT HAS IN FOSTERING
INNOVATION. I RECENTLY HAD THE
PLEASURE OF APPEARING ON A PANEL
WITH THE HEAD OF THE INNOVATION
OFFICE. UH UM AH, CALIFORNIA,
THE FBI INNOVATION OFFICE. AND
SHE TALKED ABOUT HOW, UM THEY
FASTER INNOVATION HERE AT THE
STATE. UM. AND THE STATE
REGULATORS HAVE LONG MADE THE
POINT. AND UM, ARGUING ABOUT AND
PRESENTING THE ARGUMENT FOR THE
VALUE OF THE STATE CHARTER ABOUT
THE, UM. BETTER TOUCH THAT A
STATE REGULATOR HAS WITH THE
BUSINESSES IN ITS STATE WITH THE
NEEDS OF THE CONSUMERS IN THE
STATE, AND THEREFORE YOU KNOW
THE UNIQUE POSITIONING THEY HAVE
IN SUPPORTING INNOVATIVE
BUSINESS MODELS. UM I THINK, UM,
I WOULD LIKE TO SAY THAT SVB WAS
NOT ACTUALLY VERY INNOVATIVE.
THEY WERE. THEY APPARENTLY HAD
INNOVATIVE INTEREST RATE RISK
MANAGEMENT PRACTICES, BUT, UM
YOU KNOW THEY WERE. THEY WERE A
TRADITIONAL BANK RIGHT THAT
SERVED A LOT OF INNOVATIVE TECH
COMMUNITIES, BUT THEY THEMSELVES
WERE A TRADITIONAL BANK. IN
FACT, THEY TOOK DEPOSITS THEY
LENT MONEY THEY DID FEED
BUSINESS IS VERY TYPICAL. UM, SO
I DON'T THINK IT'S LIKE A
FAILURE OF INNOVATION THAT THAT
CONTRIBUTED TO S V V S FAILURE.
UM I DO THINK GIVEN TEXT,
INCREDIBLY IMPORTANT ROLE IN
CALIFORNIA AND IN THE ECONOMY.
IT'S APPROPRIATE IN MY VIEW TO,
UM TO MAKE SURE THAT THE D F P I
CONTINUES TO UM AH FOSTER THAT
WITHIN FINANCIAL SERVICES IN THE
STATE LOOKING MORE BROADLY, I
MEAN, THEY'RE THEY'RE SPECIFIC
BUSINESSES AND IN CALIFORNIA
THAT EXISTS, YOU KNOW, LARGELY
HERE, TECHNOLOGY BEING ONE OF
THEM, BUT I JUST LET'S NOT
FORGET THE WINE INDUSTRY, WHICH
WAS HIGHLY DEPENDENT ON THIS
BUSINESS, AND THERE ARE OTHER
BANKS IN THE STATE AND THE
CENTRAL VALLEY, PARTICULARLY
THAT ARE VERY INVOLVED IN THE
AGRICULTURAL LENDING AND OTHER
THINGS, AND IT'S UM YOU KNOW THE
KNOWLEDGE THAT THE STATE REGULAR
HAS ABOUT THE IMPORTANCE OF
THOSE INDUSTRIES IS IMPORTANT,
PARTICULARLY WHEN THOSE
COMPANIES ARE SMALL. THE
CHALLENGE AS WE'VE SEEN IS WHEN
THEY GET BARGE AND THEN UM, YOU
NATURALLY REGULATORY. UM UH,
SUPERVISION TENDS TO GRAVITATE
TOWARD THE FEDERAL REGULAR AT
THAT POINT. BUT IT'S STILL
IMPORTANT TO HAVE THAT VOICE,
PARTICULARLY GIVEN THE
IMPORTANCE OF, YOU KNOW THE
PARTICULAR BUSINESSES THAT ARE
BEING SUPPORTED BY THOSE BANKS,
ESPECIALLY ESPECIALLY BECAUSE
JUST BECAUSE IT BECAME LARGE
DOESN'T MEAN IT NO LONGER WAS A
STATE CHARTER. ABSOLUTELY STATE
CHARTER IMPACT ON THE STATE AND
IF ANYTHING, REQUIRES MORE STATE
DEVELOPMENT. YES JUST A FOLLOW
UP. QUESTION TO THE FINAL.
PARDON ME TO THE FINAL FINAL
QUESTION. YOU KEEP ASKING GOOD
QUESTIONS. REMEMBER DIXON, AND
THEN WE'LL WRAP UP AFTER THIS
QUESTION. WELL WHAT DOES
INNOVATION MEAN IN THE BANKING
INDUSTRY, WHETHER IT'S
CALIFORNIA OR FEDERAL AND WHAT
ARE WE LOOKING FOR? WHEN WE HAVE
THAT NAME, AND IT'S THAT IS THAT
KIND OF A RED FLAG TO BE
CAREFUL. GOSH I LOVE THAT
QUESTION. NOBODY ASKED THAT SO
UM, I WOULD SAY WHEN SOMEBODY
ONE OF MY CLIENTS SAYS I HAVE AN
INNOVATIVE BUSINESS MODEL.
USUALLY THEY MEAN. THEY HAVE A
NEW WAY OF DELIVERING A PRODUCT.
OR SUPPORTING THE, UM,
IDENTIFICATION OF CUSTOMERS, UM
OR THEIR NEEDS, SO IT'S
TYPICALLY AROUND THE TECHNOLOGY
, UM, THAT IS BEING USED TO
SOLVE, UM, PROBLEMS IN THE
LEGACY BANKING SYSTEM, SO YOU
KNOW A BETTER WAY OF GATHERING
DATA. YOU KNOW, UH, FASTER WAY
OF PROVIDING A SERVICE. UM A
PRODUCT THAT MEETS THE NEEDS OF
A PARTICULAR GROUP. NOT WELL
SERVED CURRENTLY, UH, BY
EXISTING BANKS, FOR WHATEVER
REASON. I WOULDN'T SAY THAT
INNOVATION IS A RED FLAG. WHAT I
OFTEN SAY TO MY CLIENTS IS BRING
THE RECEIPTS. WHEN YOU'RE SAYING
YOUR INNOVATIVE. AND THAT YOU'RE
SOLVING THIS PROBLEM. SHOW US
RIGHT. A LOT OF, UM SOMETIMES
INNOVATION GETS CONFUSED WITH
THE FIELD OF DREAMS APPROACH,
WHICH IS JUST IF WE DO THIS IS
GOING TO SOLVE PROBLEMS RIGHT?
AND SO IT'S ALWAYS WORTH ASKING.
ARE YOU SOLVING THE PROBLEM? YOU
SET OUT TO SOMETHING GOOD
ANSWER. THANK YOU. VERY GOOD.
THIS WAS INCREDIBLY INSIGHTFUL,
VERY EDUCATING. THANK YOU VERY
MUCH FOR THE PRESENTATIONS. MR
BAKER RESULT AND. WE DO NEED TO
OPEN IT UP FOR PUBLIC COMMENT.
DO WE HAVE FOLKS THAT ARE HERE?
THEY WOULD LIKE TO, UH COME AND
MAKE A COMMENT. I'LL ASK IS THAT
YOU GIVE YOUR NAME AFFILIATION
AND PLEASE KEEP YOUR COMMENTS.
AH BRIEF. SAYING NOBODY MOVING.
UM I THINK THAT WE DID PUT GLUE
DOWN ON THE SEATS BEFORE THEY
SAT DOWN TO SILENCE. YOU HAVE
STUNNED THEM WITH THEIR
PRESENTATIONS. THANK YOU VERY,
VERY MUCH SAYING NO. NO. ONE FOR
PUBLIC COMMENT. THANK YOU VERY
MUCH FOR YOUR PRESENTATIONS, AND
WE LOOK FORWARD TO THE REPORTS
THAT ARE COMING OUT AT THE
BEGINNING TO MEET. THANK YOU.
THIS AREA IS CLOSED.