SVB Had No Chief Risk Officer for Months

The abrupt collapse of venture capital darling Silicon Valley Bank has exposed several glaring governance and risk management lapses, including that it parted ways with its chief risk officer in April 2022 and appears to have operated without a full-time replacement for nearly the remainder of the year.

In its 2023 proxy statement filed March 3, SVB revealed that it initiated talks with chief risk officer Laura Izurieta to leave her job in early 2022. Pursuant to a separation agreement, Izurieta stepped down April 29, 2022, and moved into a “non-executive role focused on certain transition-related duties,” which looked to be mostly an advisory role that included helping to find her replacement.

The filing did not explain what drove the departure of Izurieta, who’d joined SVB in 2016 after 16 years at Capital One, where she’d risen to executive vice president. She did not respond to a request for comment by ALM.

“Given the significance of the position of the Chief Risk Officer, it was important to the Company that the transition be facilitated in a manner that supported continuity and retention within the Risk organization as we searched for a new Chief,” SVB wrote in its filing.

The filing noted that the new CRO, Kim Olson, started on Dec. 27, 2022. Olson came from Japan-based Sumitomo Mitsui Banking Corp., where she was chief risk officer for the Americas.

No Pilot, No Captain

The CRO’s job is to manage the company’s risk-valuation process, said Charles Elson, a retired professor of corporate governance at the University of Delaware. “Someone should be there to steward the operation and evaluate how the group is functioning. Without that, it’s like having an airplane without a pilot or a ship without a captain. It will move, but to what direction? That’s the concern,” he said.

For a CRO role to sit unfilled for eight months isn’t entirely unwonted. Clifford Rossi, a former chief risk officer for Citigroup’s Consumer Lending Group, said his role also had been open for eight months before he joined Citigroup in 2007.

But the position is so technically complex that such a vacancy can be problematic. “It makes it difficult that risk is being properly managed across the enterprise,” Rossi said.

Rossi, who is an executive-in-residence at the University of Maryland’s Robert H. Smith School of Business, said he also was struck by the apparent lack of risk management expertise among board members on SVB’s risk committee, to which the CRO directly reports.

Rossi said SVB’s board, which represents shareholders, had a responsibility to ensure that management wasn’t engaging in risky activities that could lead to a situation as dire and unprecedented as the $42 billion bank run that caused the institution to fail last week.

“You need people who can effectively challenge management on those decisions. I have personally been at those meetings at places like Countrywide, Citigroup, and Washington Mutual, where I was managing liaison,” he said.

At SVB, Rossi said, “few had any level of knowledge around risk management to push back and ask the right questions. If the board can’t ask the right questions, how can they represent shareholders?”

According to its 2023 proxy statement, SVB’s risk committee members consisted of board chair and former Ernst & Young partner Beverly Kay Matthews, former U.S. Treasury Undersecretary Mary Miller, retired Kaiser Permanente chief information officer Richard Daniels, consulting firm owner Joel Friedman, and venture capitalists and investors Éric Benhamou, Kate Mitchell and Garen Staglin.

Noah Barsky, a professor in executive and graduate business programs at Villanova University School of Business, noted the absence of SVB board member Thomas King, a former Barclays investment banking CEO, from this group.

“He ostensibly has far greater substantive financial services experience than the committee comprised of a Napa vineyard owner, a retired healthcare CIO, a former U.S. Treasury undersecretary, venture capital partners and consulting firm heads,” Barsky wrote in an analysis for Forbes.

Risk Management Vacuum

Rossi posited that the absence of a CRO might have created a risk management vacuum that gave individuals on the business side who push for riskier investments “much more of a voice in risk committee meetings than they should have had.

“At least a chief risk officer is there to provide the credible challenge against the other voice. Otherwise, the [committee members] have no way of telling that what they hear isn’t right,” he explained.

SVB’s investment strategy, which included pouring billions of dollars into U.S. Treasuries and government-backed mortgage securities, has fallen under heavy scrutiny. The securities, which the bank had intended to hold to maturity, lost value as the Federal Reserve hiked interest rates.

As worried customers withdrew deposits, the bank on March 8 sold a $21 billion portfolio at a $1.8 billion loss to shore up liquidity.

“We’d been living in a declining interest rate environment, so people didn’t have to worry about managing interest rate risks, but when interest rates spiked and a bank sits on top of fixed income assets, people are going to get hurt,” Rossi said.

Big Management, Financial Mistake

Morris Pearl, a former managing director at investment firm BlackRock, put it even more bluntly.

“I think the bank management writ large screwed up in a major way,” Pearl said, noting that of the $212 billion in assets SVB reported for the fourth quarter of 2022, “at least $68 billion of this was mortgages with a high degree of interest rate risk.”

SVB’s 10-K filed Feb. 24 said $57 billion of those mortgages were government-sponsored enterprises such as Fannie Mae and Freddie Mac. A little more than $10 billion were fixed-rate collateralized mortgage obligations.

“They also had this huge unrealized loss of $11 billion” from those mortgage-backed securities, Pearl said.

Pearl, who was part of a team that helped the federal government assess the cost of Citibank’s bailout during the 2008 financial crisis, said SVB was using short-term money to fund long-term investments, and appears to have miscalculated that interest rates weren’t going to continue to rise.

“A risk officer’s job would be to think about these things at least,” Pearl said, adding that ultimately the bank’s failure belongs to the whole of its management.

The risk committee’s unusually high number of meetings — 18 in 2022, according to its proxy statement — suggests the committee suspected something was afoot. The prior year, the committee met just seven times.

“It’s unusual to have that many meetings. That tells me there was panic,” Rossi said. “Every risk committee has to have minutes. I’d love to see the minutes of those.”

(Photo: Philip Pacheco/Bloomberg)