Lawmakers are raising concerns over the close relationship between Silicon Valley Bank (SVB) and its tech executive clients, following the bank’s collapse, which sent shockwaves through the tech industry. The bank, which was the 16th-largest bank in the US and the second-largest to collapse, had allegedly made “stupid” decisions under the CEO’s leadership, according to employees. However, Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez believe that there may have been other factors, such as the bank’s “coddling” and “white glove” treatment of its biggest clients.
In a letter to SVB’s largest depositors, the lawmakers requested information about the bank’s cozy relationship with its clients. The bank’s relationship with its clients is thought to have increased the threat of contagion when the bank failed, with most of its deposits uninsured by the Federal Deposit Insurance Corporation (FDIC). The lawmakers have demanded to know how these “mutual backscratching arrangements” developed, who benefited from them, and what role they played in the bank’s failure.
The lawmakers are particularly concerned about SVB’s relationship with venture capitalists (VCs). The bank is said to have sponsored ski trips, conferences, and fancy dinners for VCs, provided lower-interest-rate mortgages for tech startup founders who other banks wouldn’t lend to, and given VC firms lines of credit that allowed them to wire money to their tech startups faster. Such arrangements may have made the bank’s collapse worse, limiting or eliminating any chance of saving the bank.
The letter from the lawmakers suggests that SVB may have been playing fast and loose with regulations, creating unnecessary risk while avoiding accountability. If the deposits made by company executives were allowed by corporate boards in exchange for personal perks, that behavior raises potential concerns about whether they were meeting their fiduciary duties. The lawmakers’ letter calls for an explanation for the bank’s hyper-reliance on tech industry firms and investors, the extent to which this resulted in an abnormally high percentage of deposits that were not insured by the FDIC, and the role that companies may have played in precipitating the $42 billion single-day-run on SVB.
The lawmakers’ call for answers from SVB’s depositors is a signal that they are taking the bank’s collapse seriously and intend to hold those responsible for it accountable. The cozy relationship between SVB and its tech clients highlights the need for greater regulation and transparency in the financial industry. If the mutual backscratching arrangements that existed between the bank and its clients contributed to its failure, then it is essential that the regulators take action to prevent such practices from happening again in the future.