Silicon Valley Bank reckless with risk, ESG push: State Financial Officers

The failure of Silicon Valley Bank is being cited by the State Financial Officers Foundation as an example of what can go wrong when financial institutions prioritize political agendas over basic risk management.

The State Financial Officers Foundation — a group of Republican state auditors, chief financial officers, controllers, and treasurers — released a statement that said Silicon Valley Bank (SVB) "should have focused on safeguarding their depositors’ money and making sound investments, but it’s clear their focus was on pushing a progressive agenda."

"Environment, Social, and Governance (ESG) prioritization is about pushing a progressive political agenda even when it is at odds with sound financial or business decision-making," the financial officers wrote. "Instead of placing an emphasis on hiring qualified candidates for critical positions within the company and making prudent financial decisions, SVB focused on ESG, particularly diversity and inclusion initiatives, and courting China while the bank left its chief risk officer position open for eight months."

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SVB failed when a run on deposits occurred after the bank was forced to sell long-term treasury bonds at a loss to maintain sufficient liquidity for its base of depositors which was skewed toward tech companies and start-ups. The announcement of losses from bond sales caused the company's stock to plummet and sparked concern among depositors who rushed to take their money out, exacerbating the bank's woes and prompting its failure.

That led to the bank’s closure and seizure by the Federal Deposit Insurance Corporation (FDIC), which in concert with the Federal Reserve and Treasury Department, deemed SVB a systemic risk to the financial system and provided protection for all the bank’s depositors — including those with account balances above the standard $250,000 cap on FDIC deposit insurance. 

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The systemic risk exception was intended to ensure that uninsured depositors, like businesses who used accounts to handle payroll and operating expenses, wouldn’t lose access to their funds while the bank’s assets were sold off.

The state financial officers noted that while "SVB was awarded an ‘A’ ESG rating, but that evidently didn’t help them avoid calamity. ESG proponents have argued against those who push back by saying that it’s really about mitigating risk."

"Clearly SVB’s ESG advocacy didn’t aid them in understanding financial risk from over-investing in government treasuries when interest rates were rising," they wrote. "It’s financial malpractice, and the inevitable outcome when fiduciary responsibility is crowded out by politicized agendas."

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The State Financial Officers Foundation statement also called out SVB for having "strong ties to China" and noted that it "reportedly worked as a key funding bridge for groups operating between China and the United States."

"It even ran a joint venture in China with Shanghai Pudong Development Bank," the financial officers added. "This is especially troublesome because it means the United States could potentially be bailing out our biggest adversary in the process of rescuing a bank whose risky ESG push guided them straight over a financial cliff."

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Silicon Valley Bank did not immediately respond to a request for comment.