- Key insight: The case litigates whether SVB Financial Trust can recover roughly $1.7 billion in deposits left at SVB when the FDIC took over the failed lender in March 2023.
- Supporting data: The two parties are at odds over whether management's decisions, like a $294 million dividend paid to the holding company, months before the collapse were imprudent.
- Forward look: The trial will continue in coming weeks, with testimony from SVB's executives including the Chief Financial Officer ongoing.
The Federal Deposit Insurance Corp. and the successor to Silicon Valley Bank's former parent company appeared in court Monday, marking the start of a trial over whether the bank holding company can recover roughly $1.7 billion in deposits that remained at the failed bank when regulators seized it in March 2023.
SVB's holding company left the deposits in question in accounts at SVB at the time of its failure. While First Citizens acquired most of the failed bank's assets, certain assets — including the $1.7 billion of deposits in question — were not part of the
After opening statements Monday morning, the defense called SVB's former Chief Financial Officer Daniel Beck as its first witness. Beck occupied nearly the entire first day of trial, with FDIC attorneys examining the witness for most of the afternoon. The trial continues Tuesday with Beck's cross-examination by plaintiff SVB's lawyers expected to continue.
The trial comes after years of legal disputes between the agency and the former parent company, given disagreements around the swift and unprecedented speed at which the bank failed, ultimately becoming the second largest bank failure in U.S. history. In a separate case last year, the
In the SVB Trust v. FDIC case, SVB Financial Trust argues the FDIC is trying to use hindsight to blame the holding company's directors and officers for business decisions that were reasonable when they were made and were repeatedly reviewed by regulators.
They argue management had to "balance many competing risks" in figuring out what to do with an unprecedented surge of deposits during the pandemic, ultimately opting to invest the excess deposits in government-backed securities. According to SVB Financial Trust, those decisions were regularly reviewed by the board and banking regulators.
"FDIC's claims stem from its disagreement with business decisions, but that does not amount to a breach of fiduciary duty. FDIC's criticisms are based on hindsight," SVB Financial Trust wrote in its June trial brief. "In light of the circumstances when the decisions were made, the 2021-2022 investments and sale of hedges were reasonable, adhered to Board-set policies, aligned with peer banks, and were endorsed by regulators."
SVB Financial Trust maintains the roughly $294 million payment in late 2022 was lawful because the bank remained solvent and highly liquid and "represented only 2% of the bank's cash on hand," while the bank then still had nearly $79.6 billion in borrowing capacity.
Even if the court finds fault with some of management's decisions, SVB argues the FDIC has not shown those actions caused the bank's collapse. They argue the bank failed because of an unprecedented depositor panic after the announcement of its balance-sheet restructuring, triggering what they call "the fastest and largest bank run in history."
The FDIC argues that executives at SVB's holding company took undue risk to maximize short-term profits, "which exposed the Bank to catastrophic losses when interest rates predictably increased."
They allege holding company officers consciously put over $115 billion in long-term, fixed-rate securities during a time of historically low interest rates, usurped internal risk limits, unwound interest-rate hedges even as they held onto the underlying securities and approved what the agency calls a "grossly imprudent" $294 million dividend from the bank at a time when unrealized losses were piling up.
The agency contends those decisions breached the officers' fiduciary duties, caused more than $5.4 billion in damages and should prevent SVB from recovering the $1.7 billion in deposits
"It is fundamental that officers of a federally insured bank and bank holding company cannot gamble with depositor funds by taking excessive interest-rate risk," the FDIC side states in its trial brief.
The FDIC maintains they repeatedly warned the officers about the risks but that the executives "sought to boost short-term earnings and the Holding Company's stock price, rather than focusing on the safety and soundness of the Bank."
Perhaps the strongest exchange at the trial came when FDIC lawyers introduced a March 2021 email sent from Beck while the bank was experiencing significant deposit growth during the pandemic. The agency counsel argued the email showed Beck recognizing that Silicon Valley Bank's existing risk management framework might not be sufficient for the new environment. FDIC attorneys highlighted alleged language in which Beck wrote that he did not believe the bank was "thinking big enough" about the "potential ramifications" of its rapid growth and that he did not think it had "the right risk metrics and indicators to shape our view of an unprecedented situation."
Beck agreed those statements reflected his thinking at the time, and, when asked whether he believed the bank had the right risk metrics to manage the possibility of sudden and massive deposit outflows, testified that he was "questioning it." The FDIC used the exchange to argue that senior management understood shortcomings in the bank's risk management well before its collapse.
