How Did Silicon Valley Bank’s Management Team Get It So Wrong?

“They were a mixture of a real bank that could handle transactions and lend money, but they also were fun people to hang out with at parties,” said

Jonathan Medved,

an Israeli venture-capital investor who worked with SVB for over 30 years.

There was another side to the bank, too, one that contributed to its abrupt collapse a week ago. It put unusual pressure on borrowers to keep the majority of their cash at SVB rather than spread it among other banks. That made some clients nervous. As long ago as 2015, regulators were growing concerned about the bank’s rapid growth and reliance on the venture-capital world.  

As the tech industry grew in 2020 and 2021, fueled by low interest rates, SVB benefited like few others. Its stock soared. Flooded with new deposits, Chief Executive

Greg Becker

and his team kept much of the money in longer-term government-backed mortgage bonds and Treasury debt, usually safe investments.

But last year, when the Federal Reserve moved to stem inflation by raising rates at the fastest pace in decades, management all but ignored the shift. For most of that year, the bank didn’t have a chief risk officer, relying on internal risk models that management found reassuring.

SVB collapsed on March 10 after a run on deposits. On Friday, the bank’s parent company filed for bankruptcy.

Now, many in the finance and technology worlds are asking how a banking franchise that weeks ago was the envy of the financial world could fail in a matter of days, and how the management team could let it all happen.

“We never thought a bank so successful could collapse so fast,” said Paul English, a tech entrepreneur who has worked with SVB for two decades and whose nonprofit, Summits Education, had more than $2 million deposited at the bank when it failed.

SVB was conceived by Bill Biggerstaff, a

Wells Fargo

& Co. executive who had played basketball against Jackie Robinson in college, and Stanford University construction management professor Bob Medearis, as the two friends drove to a resort for a poker weekend. Their idea was to create a bank that catered to ambitious, unproven companies ignored by most lenders.

In 1983, they opened SVB’s first office, in San Jose. The area was the birthplace of

Apple Inc.,

Oracle Corp.

and Atari, but many established banks were wary of young companies with little operating history. Mr. Medearis’s students had complained that they couldn’t get financing for their own business ideas.

The founders hired Roger Smith, a Kansan who had worked at Wells Fargo, as the first chief executive. He pushed bankers to outwork rivals, taking roll call every day at 8:15 a.m. and phoning staffers at their desks at 5:30 p.m., making sure they were still calling clients.

“At conferences, if Roger didn’t see you working the room, he’d get very, very upset,” said

Ken Wilcox,

who joined in 1990, was CEO for a decade and was associated with the bank until 2019.

 David Titus, a founding executive, said he and Mr. Smith celebrated successes by going to the

IHOP

down the street, where Mr. Smith ordered the chicken-fried steak. Mr. Smith couldn’t be reached for comment.

After the local real-estate market crumbled in the early 1990s, SVB took big losses. In 2001, the bank renewed its early focus on technology, where it felt it had an advantage over rivals. The bank hired dozens of bankers to build relationships with local venture-capital investors and entrepreneurs, directing each to become an expert in a different slice of the industry.

Larger banks worried about the lack of collateral, unreliable cash flows and unproven records of tech startups. SVB viewed things differently. Startups usually depended on the equity investments promised by venture-capital funds. SVB had close relationships with those funds, its bankers reasoned, so they knew how reliable this cash flow would be.

Mr. Becker joined SVB in 1993 as a loan officer, working with the bank’s software-company clients in

Palo Alto.

He quickly established himself as one of the firm’s most upbeat, hardworking employees, according to those who worked with him. By the late 2000s, Mr. Wilcox had identified him as the best candidate to succeed him in running the bank, and Mr. Becker took over as CEO in 2011. Through a representative, Mr. Becker declined to comment.

Deposits grew to nearly $40 billion by the end of 2015, from about $14 billion at year-end 2010, according to Federal Deposit Insurance Corp. reports.

By 2015, though, SVB’s fast growth had landed it on the radar of banking regulators, said Alexander Rolfe, a former FDIC official who now is a consultant. He and others grew concerned that SVB’s fortunes were tied too closely to the volatile venture-capital business. 

Companies often granted warrants to SVB as part of their loan agreements, an unusual perk for a lender. The warrants gave the bank the right to buy shares in those companies. Those assets were held by SVB’s holding company, not the bank itself, which made regulators worry the bank wouldn’t be able to access them in times of trouble. Mr. Rolfe and others were concerned that might make it hard to manage the bank during a failure.

At the time, the bank was too small to be required to file a resolution plan—a plan to deal with a failure—so the FDIC didn’t convey its concerns to bank management, Mr. Rolfe said, nor did it share them with SVB’s primary regulator, the Fed. The FDIC later convened a group of banking executives who could be available to help after a bank failure.

SVB was one of the banks “that obviously gave us concern,” Mr. Rolfe said.

SVB executives, though, continued to express optimism both inside the bank and out. In an interview with a job candidate last year, SVB President

Michael Descheneaux

told the candidate he was confident in his ability to manage risk, according to someone familiar with the conversation. Mr. Descheneaux didn’t respond to requests for comment.

By last year, SVB had grown to more than 8,000 employees. Its offices around the world looked a lot like those of the startups the bank catered to, with open architecture, white wood and lots of glass.

“They were so much more approachable than other banks, and they were conversant in our world,” said

Michael Greeley,

co-founder of venture-capital firm Flare Capital Partners in Boston. “Most lenders don’t know tech. They’re like a fish out of water.”

The bank’s technology systems, though, could be creaky, according to people familiar with the bank’s operations. The bank couldn’t always see details of a customer’s various accounts, one of them said. 

Current and former employees said SVB’s risk division struggled to hire staffers to keep up with the bank’s growth, and was subject to repeated reorganizations. SVB relied heavily on outside consultants, employees said.

A bank’s risk officers are supposed to ensure compliance with regulatory requirements, assess how the bank’s balance sheet would hold up under stress, and otherwise protect the bank from harm.

SVB spent freely to maintain its profile in Silicon Valley. It sponsored holiday functions, rooftop soirees and mixers at South by Southwest and other events, often co-hosting events with venture firms, according to dozens of pictures posted on social media by attendees over the past decade.

The bank billed itself as a one-stop shop for the tech community, offering wealth-management services to founders, banking for startups and access to the venture-capital firms, employees said. Some tech-company founders received invitation-only mortgages at below-market interest rates. 

Employees and investors referred to the strategy as SVB’s “bear hug”—its effort to make enough connections with clients that they would rely on the bank. 

SVB wanted deposits to grow. When interest rates started rising last year, the bank offered depositors higher rates than competitors. Borrowers usually had to keep most of their money at the bank as a condition of their loans, according to SVB clients. A person close to the bank said that gave SVB the ability to deal with defaults with money from the borrower’s other accounts.

In the end, the push to accumulate deposits was a big part of the problem. The FDIC typically insures deposits only up to $250,000 per bank account. Many SVB clients, especially businesses, had far more than that, making them prone to panic at any sign of problems at SVB. About 90% of the bank’s deposits were uninsured. 

At the same time, the bank had stowed much of its money in long-term assets, including mortgages and Treasurys, that it was unable, or unwilling, to sell right away. Their values plunged as rates rose. 

The bank’s asset-liability management committee had modeled likely shifts in interest rates and didn’t anticipate the surge, said the person close to the bank. SVB didn’t have a chief risk officer for most of the year, and the bank had reassigned her responsibilities, the person said.

The bank also had let expire interest-rate hedges, or protections, on its bond portfolio, leaving the bonds vulnerable to the declines as the rates rose.

“It was a baffling asset-liability mismatch,” said Mr. Wilcox, the former CEO. 

Rising rates turned the tech world upside-down in 2022 and hit the bank’s results, and the Fed signaled more rate hikes were likely this year. “We know we’re going to weather that fine,” Mr. Becker said on the bank’s fourth-quarter earnings call in January. 

The bank’s problems appear to have caught employees by surprise. In recent weeks, few sent resumes or made calls seeking new jobs, according to people in the venture capital and banking industries. When they spoke with clients, the bankers seemed upbeat, which reassured the clients.

“We’d see senior lenders at networking events, and there was no anxiety, no clue, no chatter” about anything amiss, said Mr. Greeley.

On Feb. 28, Mr. Becker and his colleagues heard from

Moody’s

Investors Service that the agency wanted to meet. On March 2, Moody’s told the team it was considering downgrading the bank’s rating. The SVB executives moved to improve the bank’s finances by selling shares.

On Wednesday evening, March 8, employees received an email about SVB’s plan to sell shares to raise capital. Most viewed the message as routine. The next morning, SVB shares plunged.

Many employees remained calm, according to people familiar with the matter, until some venture capitalists started urging clients to yank their money from the firm.

Around lunchtime on the West Coast, panic started to spread in the office. Executives paced and made phone calls. Lower-level employees texted one another, speculating about what was happening and whether they would be fired, according to an employee.

“The way they were walking around in there didn’t instill confidence,” that person said.

On Friday, March 10, many employees received their scheduled, annual bonuses. Before 9 a.m. on the West Coast, regulators had seized the bank. 

The FDIC said it would guarantee all deposits and installed veteran banker

Tim Mayopoulos

as the new CEO. He told employees this week to start aggressively trying to win back business. “We’re the safest bank in America right now,” is a pitch many bankers are using. 

—Gunjan Banerji, Rachel Louise Ensign, Angel Au-Yeung, Ben Foldy, Jack Pitcher and Peter Rudegeair contributed to this article.

“They were a mixture of a real bank that could handle transactions and lend money, but they also were fun people to hang out with at parties,” said

Jonathan Medved,

an Israeli venture-capital investor who worked with SVB for over 30 years.

There was another side to the bank, too, one that contributed to its abrupt collapse a week ago. It put unusual pressure on borrowers to keep the majority of their cash at SVB rather than spread it among other banks. That made some clients nervous. As long ago as 2015, regulators were growing concerned about the bank’s rapid growth and reliance on the venture-capital world.  

As the tech industry grew in 2020 and 2021, fueled by low interest rates, SVB benefited like few others. Its stock soared. Flooded with new deposits, Chief Executive

Greg Becker

and his team kept much of the money in longer-term government-backed mortgage bonds and Treasury debt, usually safe investments.

But last year, when the Federal Reserve moved to stem inflation by raising rates at the fastest pace in decades, management all but ignored the shift. For most of that year, the bank didn’t have a chief risk officer, relying on internal risk models that management found reassuring.

SVB collapsed on March 10 after a run on deposits. On Friday, the bank’s parent company filed for bankruptcy.

Now, many in the finance and technology worlds are asking how a banking franchise that weeks ago was the envy of the financial world could fail in a matter of days, and how the management team could let it all happen.

“We never thought a bank so successful could collapse so fast,” said Paul English, a tech entrepreneur who has worked with SVB for two decades and whose nonprofit, Summits Education, had more than $2 million deposited at the bank when it failed.

SVB was conceived by Bill Biggerstaff, a

Wells Fargo

& Co. executive who had played basketball against Jackie Robinson in college, and Stanford University construction management professor Bob Medearis, as the two friends drove to a resort for a poker weekend. Their idea was to create a bank that catered to ambitious, unproven companies ignored by most lenders.

In 1983, they opened SVB’s first office, in San Jose. The area was the birthplace of

Apple Inc.,

Oracle Corp.

and Atari, but many established banks were wary of young companies with little operating history. Mr. Medearis’s students had complained that they couldn’t get financing for their own business ideas.

The founders hired Roger Smith, a Kansan who had worked at Wells Fargo, as the first chief executive. He pushed bankers to outwork rivals, taking roll call every day at 8:15 a.m. and phoning staffers at their desks at 5:30 p.m., making sure they were still calling clients.

“At conferences, if Roger didn’t see you working the room, he’d get very, very upset,” said

Ken Wilcox,

who joined in 1990, was CEO for a decade and was associated with the bank until 2019.

 David Titus, a founding executive, said he and Mr. Smith celebrated successes by going to the

IHOP

down the street, where Mr. Smith ordered the chicken-fried steak. Mr. Smith couldn’t be reached for comment.

After the local real-estate market crumbled in the early 1990s, SVB took big losses. In 2001, the bank renewed its early focus on technology, where it felt it had an advantage over rivals. The bank hired dozens of bankers to build relationships with local venture-capital investors and entrepreneurs, directing each to become an expert in a different slice of the industry.

Larger banks worried about the lack of collateral, unreliable cash flows and unproven records of tech startups. SVB viewed things differently. Startups usually depended on the equity investments promised by venture-capital funds. SVB had close relationships with those funds, its bankers reasoned, so they knew how reliable this cash flow would be.

Mr. Becker joined SVB in 1993 as a loan officer, working with the bank’s software-company clients in

Palo Alto.

He quickly established himself as one of the firm’s most upbeat, hardworking employees, according to those who worked with him. By the late 2000s, Mr. Wilcox had identified him as the best candidate to succeed him in running the bank, and Mr. Becker took over as CEO in 2011. Through a representative, Mr. Becker declined to comment.

Deposits grew to nearly $40 billion by the end of 2015, from about $14 billion at year-end 2010, according to Federal Deposit Insurance Corp. reports.

By 2015, though, SVB’s fast growth had landed it on the radar of banking regulators, said Alexander Rolfe, a former FDIC official who now is a consultant. He and others grew concerned that SVB’s fortunes were tied too closely to the volatile venture-capital business. 

Companies often granted warrants to SVB as part of their loan agreements, an unusual perk for a lender. The warrants gave the bank the right to buy shares in those companies. Those assets were held by SVB’s holding company, not the bank itself, which made regulators worry the bank wouldn’t be able to access them in times of trouble. Mr. Rolfe and others were concerned that might make it hard to manage the bank during a failure.

At the time, the bank was too small to be required to file a resolution plan—a plan to deal with a failure—so the FDIC didn’t convey its concerns to bank management, Mr. Rolfe said, nor did it share them with SVB’s primary regulator, the Fed. The FDIC later convened a group of banking executives who could be available to help after a bank failure.

SVB was one of the banks “that obviously gave us concern,” Mr. Rolfe said.

SVB executives, though, continued to express optimism both inside the bank and out. In an interview with a job candidate last year, SVB President

Michael Descheneaux

told the candidate he was confident in his ability to manage risk, according to someone familiar with the conversation. Mr. Descheneaux didn’t respond to requests for comment.

By last year, SVB had grown to more than 8,000 employees. Its offices around the world looked a lot like those of the startups the bank catered to, with open architecture, white wood and lots of glass.

“They were so much more approachable than other banks, and they were conversant in our world,” said

Michael Greeley,

co-founder of venture-capital firm Flare Capital Partners in Boston. “Most lenders don’t know tech. They’re like a fish out of water.”

The bank’s technology systems, though, could be creaky, according to people familiar with the bank’s operations. The bank couldn’t always see details of a customer’s various accounts, one of them said. 

Current and former employees said SVB’s risk division struggled to hire staffers to keep up with the bank’s growth, and was subject to repeated reorganizations. SVB relied heavily on outside consultants, employees said.

A bank’s risk officers are supposed to ensure compliance with regulatory requirements, assess how the bank’s balance sheet would hold up under stress, and otherwise protect the bank from harm.

SVB spent freely to maintain its profile in Silicon Valley. It sponsored holiday functions, rooftop soirees and mixers at South by Southwest and other events, often co-hosting events with venture firms, according to dozens of pictures posted on social media by attendees over the past decade.

The bank billed itself as a one-stop shop for the tech community, offering wealth-management services to founders, banking for startups and access to the venture-capital firms, employees said. Some tech-company founders received invitation-only mortgages at below-market interest rates. 

Employees and investors referred to the strategy as SVB’s “bear hug”—its effort to make enough connections with clients that they would rely on the bank. 

SVB wanted deposits to grow. When interest rates started rising last year, the bank offered depositors higher rates than competitors. Borrowers usually had to keep most of their money at the bank as a condition of their loans, according to SVB clients. A person close to the bank said that gave SVB the ability to deal with defaults with money from the borrower’s other accounts.

In the end, the push to accumulate deposits was a big part of the problem. The FDIC typically insures deposits only up to $250,000 per bank account. Many SVB clients, especially businesses, had far more than that, making them prone to panic at any sign of problems at SVB. About 90% of the bank’s deposits were uninsured. 

At the same time, the bank had stowed much of its money in long-term assets, including mortgages and Treasurys, that it was unable, or unwilling, to sell right away. Their values plunged as rates rose. 

The bank’s asset-liability management committee had modeled likely shifts in interest rates and didn’t anticipate the surge, said the person close to the bank. SVB didn’t have a chief risk officer for most of the year, and the bank had reassigned her responsibilities, the person said.

The bank also had let expire interest-rate hedges, or protections, on its bond portfolio, leaving the bonds vulnerable to the declines as the rates rose.

“It was a baffling asset-liability mismatch,” said Mr. Wilcox, the former CEO. 

Rising rates turned the tech world upside-down in 2022 and hit the bank’s results, and the Fed signaled more rate hikes were likely this year. “We know we’re going to weather that fine,” Mr. Becker said on the bank’s fourth-quarter earnings call in January. 

The bank’s problems appear to have caught employees by surprise. In recent weeks, few sent resumes or made calls seeking new jobs, according to people in the venture capital and banking industries. When they spoke with clients, the bankers seemed upbeat, which reassured the clients.

“We’d see senior lenders at networking events, and there was no anxiety, no clue, no chatter” about anything amiss, said Mr. Greeley.

On Feb. 28, Mr. Becker and his colleagues heard from

Moody’s

Investors Service that the agency wanted to meet. On March 2, Moody’s told the team it was considering downgrading the bank’s rating. The SVB executives moved to improve the bank’s finances by selling shares.

On Wednesday evening, March 8, employees received an email about SVB’s plan to sell shares to raise capital. Most viewed the message as routine. The next morning, SVB shares plunged.

Many employees remained calm, according to people familiar with the matter, until some venture capitalists started urging clients to yank their money from the firm.

Around lunchtime on the West Coast, panic started to spread in the office. Executives paced and made phone calls. Lower-level employees texted one another, speculating about what was happening and whether they would be fired, according to an employee.

“The way they were walking around in there didn’t instill confidence,” that person said.

On Friday, March 10, many employees received their scheduled, annual bonuses. Before 9 a.m. on the West Coast, regulators had seized the bank. 

The FDIC said it would guarantee all deposits and installed veteran banker

Tim Mayopoulos

as the new CEO. He told employees this week to start aggressively trying to win back business. “We’re the safest bank in America right now,” is a pitch many bankers are using. 

—Gunjan Banerji, Rachel Louise Ensign, Angel Au-Yeung, Ben Foldy, Jack Pitcher and Peter Rudegeair contributed to this article.