Judge Blocks SVB Parent From Shifting $1.71 Billion Loss to FDIC

The Federal Deposit Insurance Corporation has prevailed in a case stemming from Silicon Valley Bank’s collapse.

As Reuters reported Monday (Aug. 31), a federal judge has ruled that the former parent company of the bank (SVB) cannot pursue a $1.71 billion claim against the regulator (FDIC).

According to the report, U.S. District Judge Beth Labson Freeman in San Jose ruled that the trust succeeding the bank’s holding company, SVB Financial Trust, must take responsibility for the negligent risk-taking by former executives.

The decision came after a 12-day bench trial, with Freeman ruling that the bank’s former executives were negligent in taking excessive interest rate and liquidity risks, with encouragement from the board.

She ruled that the trust was responsible for the executives’ ill-fated decisions to boost profits by investing heavily in long-term government and mortgage-backed securities.

Silicon Valley Bank, which had about $209 billion in assets, collapsed after rising interest rates triggered at least $4.52 billion in losses in its investment portfolio. This led to a bank run, disrupting many technology startups whose deposits it held. The bulk of the bank’s deposits were uninsured.

SVB’s demise was one of the largest bank failures in U.S. history and came around the same time as two other collapses in 2023, those of Signature Bank and First Republic Bank.

The trust argued that the holding company’s directors were protected by the business judgment rule and blamed the FDIC for selling the bank’s securities at a loss. Judge Freeman rejected these arguments, writing that the holding company chose to run the bank in adherence to its own global policies and metrics.

“Having made this choice, it must live with the consequences,” Freeman wrote, per Reuters.

The report noted that the FDIC is also suing several former executives and directors, including onetime CEO Gregory Becker, to recover billions for alleged gross negligence and breach of fiduciary duty.

In other FDIC news, the regulator last week—along with the Office of the Comptroller of the Currency (OCC)—issued a final rule establishing a uniform definition of an “unsafe or unsound practice” to focus the attention of examiners and institutions on material financial risks.

FDIC Chairman Travis Hill said in a statement that the new rule changes the “nature of supervisory criticisms” in two main ways.

“First, it shifts our attention towards underlying fundamental risks and away from banks’ processes for managing those risks, and second, it imposes a materiality threshold for evaluating those potential risks,” said Hill. “In combination, the result is that examiners will focus only on issues that can have a material impact on the financial condition of an institution and on actual violations of relevant laws or regulations.”