BOG-FRS - Public Release, April 2023

INTERNAL FR INTERNAL FR/OFFICIAL USE // FRSONLY INTERNAL FR/OFFICIAL USE // FRSONLY 

Date: December 1, 2022 

To: Division of Supervision and Regulation, BOG 

From: Dedicated Supervisory Team Lead, FRB-SF 

CC: FRB-SF

 Large Institution Supervision, FRB-SF

 Large and Foreign Banking Organizations, FRB-SF 

Redacted Redacted RedactedRedacted Redacted

Subject: Recession Readiness – Silicon Valley Bank (SVB) 

Based on the dedicated team’s supervisory work, SVB’s key exposures leading into a recession are centered 

on liquidity, credit, and operational risk. For each of these three areas, we highlight below: (i) the factors 

that drive the exposure; (ii) the work undertaken to prepare for a recession; and (iii) supervisory coverage 

of these areas. 

LIQUIDITY 

SVB’s liquidity presents the greatest exposure in a recession. Year to date 2022, SVB has already incurred 

$49 billion, or 12.5%, of net client balance (i.e., deposits + off-balance sheet investments) outflows. The 

magnitude of these outflows has prompted management to activate certain aspects of its contingency 

funding plan. In the short-term, a higher cost of funds represents the most direct impact of SVB 

experiencing a recession. This is already reflected in a substantial decline in forecasted ROE for 2023. The 

longer-term impact could be material charges against earnings if SVB must liquidate its securities portfolio 

to fund unexpected net deposit outflows. 

Notable points related to factors driving SVB’s liquidity risk exposure: 

1. SVB’s funding base is primarily supported by tech and life science clients at various stages of growth. 

These clients continuously “burn” cash to fund operations and growth, while at the same time are 

dependent on future fundraising for financial support. Economic uncertainty and decline in market 

valuations have resulted in both higher cash burn rates, as well as lower fundraising driven by fewer 

initial public offering (IPOs) and reduced Venture Capital (VC) funding. If cash burn remains elevated 

and fundraising stays lackluster, SVB’s funding base will continue to experience sizeable net outflows. 

2. SVB’s liquidity buffer to fund deposit outflows is comprised of cash reserves and U.S. government and 

agency investment securities. The current interest rate environment has resulted in material 

unrealized losses in SVB’s securities portfolio. While SVB has been able to rely on short term repo and 

FHLB borrowings to cover outflows and maintain cash reserves, any disruption in these markets or 

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BOG-FRS - Public Release, April 2023

INTERNAL FR 

Federal Reserve Bank of San Francisco 

INTERNAL INTERNAL FR/OFFICIAL USE // FRSONLY INTERNAL FR/OFFICIAL USE // FRSONLY FR/OFFICIAL USE // FRSONLY

Supervision + Credit Internal Memorandum 

issues with existing monetization mechanisms will cause major challenges for management to monetize 

its securities portfolio without a negative earnings and capital impact.

1 

Actions taken to prepare for a recession: 

1. Given its business model, SVB recognized early the need to maintain a substantial liquidity buffer and 

intentionally maintained a loan to deposit ratio below 40%. SVB deployed the proceeds of prior years’ 

deposit inflows into the securities portfolio rather than pursue loan growth. 

2. The net outflows incurred in 2022 has caused SVB to use its liquidity buffer, but it has also prompted 

management to develop new strategies should outflows continue. Management has identified the 

following 4 actions if recession-related liquidity risks persist: (i) incent clients to shift monies from offbalance sweep money market accounts to on-balance sheet deposit products; (ii) borrow against the 

securities portfolio through repos and FHLB lines; (iii) obtain unsecured, term wholesale funding 

through brokered deposits; and (iv) liquidate investment securities at a loss. 

3. SVB has enacted actions referenced in items (i) and (ii) above and is considering item (iii). While all 

three actions increase SVB’s cost of funds, the goal is to avoid selling substantial amount of securities at 

a loss or tainting the portfolio by selling HTM securities. The firm is also considering a restructure of its 

investment portfolio by selling lower-yielding securities and reinvesting proceeds at current yields. This 

is early in the planning stage and may involve a new accounting standard that allows for a one-time 

transfer from AFS to HTM for hedging purposes. 

4. The firm’s 2023 baseline forecast reflects a 16% deposit decline despite further plans to move clients’ 

balances from off-balance sheet products to on-balance sheet deposits. The deposit decline, in 

conjunction with higher funding cost associated with deposit mix shifts and increased wholesale 

funding, is expected to drive ROE down to 8.6% from mid-to-high teens of the last several years. 

5. Supervisory Coverage for 2023: 

a. DST is coordinating with SVB’s external auditors on the propriety of the potential investment 

portfolio restructure relative to the most current hedge accounting standard. 

b. SVB will be included in the 2023 HLR, which will assess liquidity buffer monetization and 

composition. 

c. The 2023 Sup Plan also includes an Interest Rate Risk review, which will assess the firm’s deposit 

modeling under various rate scenarios. 

CREDIT 

SVB’s loan portfolio presents some loss exposure in a recession, but management has mitigated a 

substantial amount of credit risk through strategic changes in portfolio composition over time, establishing 

an effective Special Assets function, and pro-active increases in loan loss provisions. 

Notable points related to factors driving SVB’s credit risk exposure: 

1. High risk investor-dependent (ID) loans represent less than 10% of loan portfolio: ID loans present 

high inherent credit risk because these borrowers have yet to demonstrate sustained profitability. A 

severe recession and sustained slowdown in VC funding and IPOs will drive up defaults and losses. 

SVB’s ID portfolio, however, accounts for only 8.6% of the total loan book but 44.5% of the Allowance 

1 76% of the $124 billion securities portfolio is designated Held to Maturity (HTM). Total unrealized losses in the securities portfolio are 

$13.4 billion against $16.9 billion of tier 1 capitalh 

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BOG-FRS - Public Release, April 2023

INTERNAL FR 

Federal Reserve Bank of San Francisco 

INTERNAL INTERNAL FR/OFFICIAL USE // FRSONLY INTERNAL FR/OFFICIAL USE // FRSONLY FR/OFFICIAL USE // FRSONLY

Supervision + Credit Internal Memorandum 

for Credit Losses (ACL). Losses have come mainly from the early-stage portion of the ID portfolio that 

represents only 2.64% of the total loan book. 

2. Global Funds Banking (GFB), i.e., Capital call lines of credit, accounts for roughly 60% of the total loan 

book but have experienced minimal historical losses over three decades. Fulfillment of limited partner 

(LP) commitments is the repayment source for these credits, and the LPs associated with SVB’s 

portfolio are comprised of institutional investors, most notably pension funds, college endowments, 

and insurance companies. Give the granularity and diversity of the LPs,2 widespread defaults are 

unlikely even in a recession. Losses are most likely to come from idiosyncratic events related to single 

funds (e.g., fraud or fund embezzlement). 

The following exhibit illustrates how the lower-risk GFB loans represent the largest portion (59%) and the 

higher -risk ID loans represent a relatively smaller portion (8%) of SVB’s total portfolio: 

PREMIUM WINE Total Commitments

BALANCE SHEET 1% NON NICHE AND OTHER 

GLOBAL FUNDS BANKING 

59% 

CASHFLOW 

11% 

INVESTOR DEPENDENT 

8% 

BOSTON PRIVATE 

8% 

PRIVATE BANK 

7% 

DEPENDENT 

5% 

1% 

Actions taken to prepare for a recession: 

1. In Q2 2022, SVB increased provision expenses specific to its capital call lines of credit such that the ACL 

for this portfolio is up from 18 basis points to 22 basis points. This current ACL level exceeds the single 

largest annual loss. 

2. Over the course of several years, SVB management has purposely restructured its loan portfolio 

composition, such that the higher-risk ID segment has progressively been reduced and the lower-risk 

GFB segment increased in size. Prior to the 2008 financial crises, the ID segment accounted for as 

much as 35% of the total loan book. ID loans to early-stage companies, who had yet to generate profit, 

accounted for as much as 15% of the total loan book. For emphasis, and as noted above, the ID 

portfolio currently represents less than 9% of the total loan book, and early-stage ID loans represents 

less than 3% of the total loan book. 

3. SVB management has maintained a highly effective Special Assets Advisory function as a key mitigating 

control to the high inherent credit risk associated with the ID portfolio. Given lender liability 

considerations, the Special Assets Advisory function is not directly involved in sale of company decisions in 

the event of default, but they are actively engaged on matters related to loan and collateral structure so 

that SVB is repaid prior to any new equity investments and outside of claw back periods in bankruptcy 

filings. 

2 SVB supervision staff recommended SVB management analyze LP concentrations in 2020. This analysis provided an enhanced level of 

risk reporting to quantify the degree of LP diversification in SVB’s GFB portfolio. 

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BOG-FRS - Public Release, April 2023

INTERNAL FR 

Federal Reserve Bank of San Francisco 

INTERNAL INTERNAL FR/OFFICIAL USE // FRSONLY INTERNAL FR/OFFICIAL USE // FRSONLY FR/OFFICIAL USE // FRSONLY

Supervision + Credit Internal Memorandum 

4. Supervisory Coverage for 2023: 

a. The DST completed an asset quality review in 3Q 2022 and confirmed that credit practices remain 

prudent, and ACL is adequate. 

b. The 2023 Sup Plan includes two asset quality reviews, which will dive into material portfolios most 

prone to a recession. 

c. SVB is included in the 2023 HCR, which will include credit workstreams to assess the firm’s losses 

under stress and impact on capital adequacy. 

OPERATIONS 

While not a risk that is specifically connected to a recession, SVB’s operations risk has been an exposure 

that examination staff has highlighted over multiple supervisory cycles. SVB’s growth in balance sheet 

size, complexity and geographic footprint has outpaced their infrastructure investments. Several 

findings have been cited related to information technology, information security, and enterprise risk 

management. In a recession, SVB could face earnings pressures that prompt decisions to reduce 

overhead. These decisions would need to be thoughtfully implemented. The dedicated team will 

continue to monitor this to ensure board and senior management adequately prioritize remediation of 

risk management and control gaps amid the cost reduction pressure. 

Notable points driving SVB’s operational risk exposure: 

1. SVB has clients and offices across the world, including China, Europe, and the Middle East. Payment 

system activities frequently represent billions of dollars in daily transactions. SVB’s information 

technology platforms have been developed in a decentralized manner. Risk reporting off these 

systems have not been effective with various supervisory findings cited over multiple 

examinations. 

2. SVB’s board of directors has not effectively challenged or held management accountable for 

operational risk management. Historically, SVB has relied heavily on outsourced professional 

services, and this reliance has created issues with inconsistent and ineffective operational controls. 

Actions taken to prepare for a recession and longer-term resilience: 

1. SVB has committed over $1 billion over the course of the last two annual budget cycles specifically 

towards information technology and enterprise risk management. While the return on these 

budgetary commitments has yet to fully realized, SVB leadership acknowledges that addressing the 

deferred maintenance is a high priority. 

2. SVB’s board collectively has recognized the need to upgrade the quality of its directors and 

intensify its oversight. In the past year, SVB has appointed two new external directors, both with 

large bank executive officer risk management experience. Additionally, SVB has replaced its Chief 

Risk Officer. Lastly, SVB has revamped its executive officer incentive compensation program with 

increased focus on risk management rather than company financial performance. 

3. Supervisory Coverage for 2023: 

a. Routine Continuous Monitoring specifically targeted on how SVB’s Information Technology and 

Risk Management infrastructure is being built within an effectiveness and budgetary context 

b. Routine Continuous Monitoring specifically targeted on remediation of MRIAs related to 

effectiveness of board oversight and three lines defense risk management 

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