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The reasons for Silicon Valley Bank’s collapse are fairly obvious. The bank’s poor risk management strategy left it with insufficient cash to meet the needs of its largely tech sector customers base, which was particularly hard hit by rapidly rising interest rates. The important question at this point isn’t what happened, but why.
An article the Associated Press describes as part of its "effort to address widely shared misinformation," claims that there is "no evidence to support claims that the bank’s stated commitment to supporting and investing in diversity and sustainability efforts played a role in its demise." In conclusion, the article offers this quote from Peter Conti-Brown, a professor from the Wharton School of Business, – "SVB failed because its bankers were bad at being bankers, something that no extra time away from meetings about diversity would have fixed."
With all due respect to the AP, is it really "misinformation" to consider the extent to which SVB’s corporate focus on social issues may have taken management’s eye of the ball of actually running a successful business?
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SVB’s bankers weren’t just "bad at being bankers" – they were inexplicably horrible at being bankers, ignoring a risk obvious to anyone who has ever seen Jimmy Stewart in the classic movie "It’s a Wonderful Life." That is, if a bank lacks sufficient liquid assets to meet its depositors’ demands for funds, it will fail.
A customer stands outside a shuttered Silicon Valley Bank headquarters on March 10, 2023, in Santa Clara, California. Silicon Valley Bank was shut down on Friday morning by California regulators and was put in control of the U.S. Federal Deposit Insurance Corporation. (Justin Sullivan/Getty Images)
The failure of SVB’s bankers to see this risk was particularly egregious because they were warned. According to Michael S. Barr, The Fed’s vice-chair for Supervision, the bank’s Fed supervisors highlighted concerns with its interest rate/liquidity risk more than a year before SVB failed.
Nor was the cause of this problem a surprise. In March 2022, the Fed announced that it would be raising interest rates to fight spiraling inflation and that it anticipated "ongoing increases." People just won’t pay the same amount for a bond with a 2% yield as they will for one yielding 4%.
So, you don’t need a degree in economics to know that rising interest rates will decrease the value of a "hold to maturity" bond portfolio with a low average interest rate such as SVB’s. If you need to sell the bonds in such a portfolio quickly, you will lose a lot of money. Seems pretty basic.
Barr described the problems that led to SVB’s collapse as "really basic" banking risks and "a textbook case of mismanagement." So, why would SVB’s management fail to hedge its patently obvious exposure to rising rates?
Not having a chief risk officer for nine critical months certainly contributed to SVB’s problems, but surely there were other executives at the bank who understood the need to manage such an obvious risk. A more insidious problem for SVB was management focus.
Running a company successfully is extremely difficult even when doing so is your focus – and virtually impossible when it’s not. It is past time to acknowledge that, as the culture war invades boardrooms and C-suites, maintaining a corporate focus on financial success has become increasingly difficult. Ignoring the contribution this lack of focus likely played at SVB would be to ignore the obvious.
"Woke capitalism," a classic oxymoron, dominated SVB’s corporate culture, including its dedication to DEI or "diversity, equity and inclusion." The bank had a website describing its commitment to DEI hiring. It ran DEI webinars and classes. Its 2022 ESG (environmental, social and justice) Report listed "Building a Culture of Diversity, Equity and Inclusion," as a strategic initiative (DEI falls under the S or "social" in ESG).
Here's the important part – the employees got the message. The Financial Times interviewed SVB’s ex-employees and found that insiders believed top management was "inordinately focused on social issues" when they should have been focused on "properly hedging against its interest rate risk." Yep, it was that obvious.
The movie "It's a Wonderful Life," produced and directed by Frank Capra teaches the basics about running a bank that SVB executives needed to learn. (CBS via Getty Images)
One executive complained that it felt like they were "at work on a college campus," with "weekly internal ‘TED talks’ on social issues and classes on ‘how to make sure you were not committing a microaggression.’" Another commented that "there was an unseriousness to it," an "overemphasis on things that weren’t important and not enough on things that are."
Comments like these from your employees would have any CEO quaking in their boots. But SVB’s upper management either never heard them or failed to heed them. While it is difficult to quantify the extent to which SVB’s so-called "social justice" focus impacted the bank’s performance, for anyone who has actually run a large organization, the risks are obvious.
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For example, say that an SVB employee saw a serious problem management seemed to be ignoring. After frequent DEI webinars and classes on avoiding "microaggressions," how likely is it that this executive would challenge the competence of a DEI hire with responsibility for that portion of the business by pointing out an obvious risk they were missing?
The potential for accusations that such a challenge was actually a "microaggression" based on the employee’s race, sex, or other DEI qualifier – rather than a valid criticism – would make such a communication far less likely and the risks of a problem going unaddressed far more likely. Simply safer to just keep your mouth shut than risk being labeled a racist, sexist or some other-ist.
Of course, SVB’s management team was entitled to support whichever social causes and lead its employees to focus on whatever they chose. Having a diverse workforce is a positive for any business. But there are risks when corporate DEI policies displace common sense-profit focused business practices and create a fear of offense that can chill conduct as important as employee communication.
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Unfortunately, these risks are not unique to SVB. Rather, they have permeated our economy. An online initiative called "CEO ACT!ON for Diversity and Inclusion" lists over 2,400 CEOs who have signed on pledging to promote DEI initiatives in their companies. That list includes virtually every major American corporation. Some may be social justice-washing, but not all. SVB’s CEO was a signatory.
We will never know for certain the extent to which SVB’s failure was due to leadership being "inordinately focused on social issues," as SVB insiders believe. Honest consideration of that issue would violate today’s norms of political correctness. But, surely there were SVB executives who understood the obvious interest rate/liquidity risks the bank faced. They either remained silent or were ignored – and the sixteenth largest bank in America collapsed.