Now We Know Why They Did Not Replace Their Chief Risk Officer

It turns out that Silicon Valley Bank changed its risk models when it was found that its risk assessments showed that it was accumulating significant risks.

Unless and until this sort of behavior comes with sanctions against the executives who sign off on such behavior, this will continue.

Arrest and personal liability are required to deter such behavior:

Flush with cash from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to juice profits that quickly triggered an internal alarm.

In buying longer-term investments that paid more interest, SVB had fallen out of compliance with a key risk metric. An internal model showed that higher interest rates could have a devastating impact on the bank’s future earnings, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations.

Instead of heeding that warning — and over the concerns of some staffers — SVB executives simply changed the model’s assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, initially predicted that rising interest rates would have minimal impact.

………

On March 8, the bank was forced to raise additional cash by selling securities at a $1.8 billion loss. That touched off panic among SVB clients, who staged one of the biggest bank runs in U.S. history. Fanned by social media, depositors tried to withdraw $42 billion in a single day. The next morning, the bank collapsed and federal regulators took control.

The episode shows that executives knew early on that higher interest rates could jeopardize the bank’s future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB’s stunning meltdown.

“Management always wanted to tell a growth story,” one former employee involved in the bank’s risk management said. “Every quarter, there was always this pressure to deliver earnings.

Arrest the, fine them, sue them, and ban them from finance for life.