FACTS IN FOCUS: Bank collapse blamed on wake bank policy

As Wall Street rebounds from the swift demise of the Silicon Valley bank — the biggest U.S. bank failure since the 2008 financial crash — some social media users have focused on a single culprit: its socially driven or “awakened” agenda.

But the Santa Clara institution’s commitment to diversity, equality and inclusion, or DEI, was not the driving force behind the bank’s collapse, banking and financial experts say. His poor investment strategies and a client base prone to disruptive banking.

Here’s a closer look at the facts.

CLAIM: The Silicon Valley Bank failed because it focused on awakening policies such as diversity, equality, and inclusion.

FACTS: The nation’s 16th largest bank collapsed due to poor investment strategies and risks that left the bank with insufficient cash to sustain a massive asset divestment of its clients, mostly from the tech sector, which has been particularly hard hit in the current economy , financial and explain banking experts.

There is also 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, they said.

Posts on social media following the collapse, however, were critical of any number of the bank’s diversity efforts, such as launching a month-long LGBTQ pride campaign or donations to racial justice causes.

Some have even cited the bank’s Environment, Social and Governance (ESG) 2022 report, which contains a commitment to provide at least $5 billion in loans, investments and other financing by 2027 for sustainable development efforts.

“The WOKE agenda coming from SVB is largely to blame for their FAILURE,” said a Twitter user in a post that has been liked or shared nearly 4,000 times as of Wednesday. “The insane leftist agenda is DESTROYING our future. Go wake up, go bust!”

But the institution’s downfall had all the hallmarks of a “classic bank run,” Peter Cohan, professor of management practice at Babson College in Wellesley, Massachusetts, said in an email. collapse of the SVB.

Rodney Ramcharan is professor of finance at the Marshall at the University of Southern California, agreed, dismissing criticism that the bank had reportedly donated millions to racial justice causes over the years, calling them “trivial and out of place” given that the bank had over $200 billion dollars in assets before he failed.

Social media users and conservative news outlets say the bank has donated more than $70 million to Black Lives Matter and similar groups, citing a database maintained by the Claremont Institute, a conservative think tank.

But the California-based organization admitted on Thursday that the “vast majority” of the funding it cites actually went to “reparative initiatives,” which it defines as “racially discriminatory recruitment programs; race-based subprime lending; party initiatives of voters; and the efforts of the DEI”, and not directly to BLM or other non-profit organizations.

“This is clearly stated in the description of the database for SVB and in the sources we link to,” the institute wrote in an email.

The Black Lives Matter Global Network Fund confirmed in its own statement that it had not received $70 million from the bank.

“Even if we did, the idea that this type of contribution would be controversial is rooted in the pathology that black organizations do not deserve funding,” the organization wrote. “Contributions to various progressive black causes are irrelevant in a conversation about what led to the collapse of the bank.”

In addition, nothing in the bank’s publicly available financial statements indicates any disruptive spending on diversity initiatives, Ramcharan added. If there were problems, they would be included in reports to regulators such as the Federal Reserve.

“The bank would incur loan losses by writing off bad loans to wake-up firms,” he explained in an email. “So it’s not a matter of opinion, but factual data. Instead, there are no unusual loan losses or provisions for possible loan losses.”

According to William Chittenden, a professor at Texas State University’s McCoy College of Business Administration, the bank’s $5 billion commitment to sustainability efforts represents a promise to make future loans and is not indicative of the financial investment that led to the bank’s current collapse.

“If we were in 2027 and SVB had billions of past due ‘sustainability loans’ then I would agree that the failure could be due to the types of loans they made,” he wrote in an email. “But to say that the bank has failed because of loans that they probably haven’t even issued yet doesn’t make sense to me.”

What is clear from the financial disclosure documents is that the bank, which was founded in 1983, did not adequately manage the risks of the large investments it made in recent years as it grew rapidly, experts agreed.

From 2019 to 2021, SVB purchased tens of billions of dollars worth of mortgage-backed securities, US Treasuries and other relatively conservative investments at low interest rates, explained Aaron Klein, a financial expert at the Brookings Institution, a DC think tank. But the bank did not hedge those bets with other investments.

With interest rates rising rapidly in the past year, the value of those investments has come down as bank customers have increasingly cut their funds to make ends meet in a deteriorating economy, he and other experts said. The bank was forced to sell $21 billion worth of securities for a loss of almost $2 billion.

“The bottom line: the bank went bankrupt due to liquidity problems,” Chittenden wrote in an email. “The failure had nothing to do with the quality of the loans of any wake-up bank.”

According to Klein, another decisive factor in the bank’s collapse was its customer base.

The bank catered primarily to tech workers and venture capital-backed companies, including some of the industry’s best-known brands. But almost all of them were considered uninsured depositors, meaning they had more than $250,000 in their accounts covered by the Federal Deposit Insurance Corporation in the event of a bank failure, he said.

“Uninsured depositors are more likely to flee, making the bank less stable,” Klein writes.

Ironically, for all its claims of being a “wake bank,” SVB hasn’t been all that diverse, at least in key leadership positions, said Peter Conti-Brown, a professor of financial regulation at the Wharton School of the University of Pennsylvania.

According to the bank’s website, the bank’s executive team was all-white and mostly male, and its board of directors had only one black member and one LGBTQ person.

Bank representatives did not respond to requests for comment, and the FDIC and other federal and state regulators declined to comment.

“It’s not unusual for SVB to focus on diversifying and moving away from that homogeneity – banks and businesses of all shapes and sizes have done the same,” Conti-Brown wrote in an email, referring to the company’s management. “SVB failed because its bankers were bad bankers and no amount of extra time away from diversity meetings would fix that.”

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This is part of AP’s efforts to combat widespread misinformation, including working with third-party companies and organizations to add factual context to misleading content that is circulating online. Learn more about fact checking on the AP website.