Problem Set 17

SVB's early success relied mainly on its ability to compete on retail pricing and consumer convenience rather than specialization.

FALSE

SVB's early growth came from niche specialization, not retail competition. It focused on lending and cash-management for venture-backed tech and life-science firms that traditional banks avoided because they lacked collateral and positive cashflow.

SVB's "relationship banking" approach meant that credit decisions often mirroredventure-capital judgments rather than traditional collateral analysis.

TRUE

Credit decisions were often influenced by the reputation of venture-capital backers rather than borrower fundamentals. SVB assumed that if credible VCs supported a start-up, repayment risk was implicitly shared by those investors. This created an interdependence between SVB's loan performance and venture-funding cycles.

The expansion into wealth management and capital-call lending diversified SVB's riskby reducing exposure to venture-backed clients.

FALSE

Expanding into wealth management, capital-call lending, and fund banking increased exposure to the same innovation ecosystem. These businesses served founders and venture funds—the same entities already dominating deposits—so concentration risk actually intensified. Diversification in activity did not equal diversification in client base.

SVB's culture of loyalty and client intimacy strengthened governance oversight byensuring close monitoring of borrower performance.

FALSE

A culture of closeness improved customer retention but weakened governance independence. Relationship-managers often acted as advocates rather than risk gatekeepers, which reduced internal challenge to borrowers' or clients' financial realities. This blurred the line between partnership and prudence

Aggressive balance-sheet expansion during 2019-2021 lowered liquidity risk because of rising deposit inflows from venture funding.

FALSE

Rapid deposit growth from 2019 to 2021 heightened liquidity risk because the funds were short-term VC proceeds. These deposits could exit instantly once venture financing slowed. Growth looked healthy on paper but lacked the behavioral stability regulators associate with core deposits.

Duration risk emerged when SVB lengthened its securities portfolio during a low-rateenvironment, magnifying sensitivity to future rate increases.

TRUE

When SVB lengthened the duration of its securities at the bottom of the rate cycle, it locked in low yields and made itself extremely sensitive to rising rates. The risk was invisible while yields were stable, but once the Fed tightened, unrealized losses ballooned. This was a classic duration mismatch born of complacency.

Staying below the $250 billion threshold allowed SVB to avoid certain supervisoryrequirements that might have flagged concentration and liquidity risk earlier.

TRUE

Remaining below the $250 billion threshold exempted SVB from full liquidity-coverage ratios and advanced stress testing. Those frameworks would likely have exposed concentration and market-value risks earlier. The size cap thus created a regulatory blind spot during a period of explosive growth.

Uninsured corporate deposits are considered core funding because they represent long-term, relationship-based balances.

FALSE

Uninsured corporate deposits are not core funding; they are volatile and price-sensitive. They depend on corporate cash cycles, not retail loyalty or insurance protection. Once confidence falters, these deposits flee almost instantly—as the 2023 run demonstrated.

The lack of geographic diversification increased correlation among SVB's depositorbase during stress conditions.

TRUE

Heavy geographic and sectoral concentration meant that a shock to the California tech ecosystem could propagate across nearly the entire client base. Even if credit losses remained low initially, correlated withdrawals and funding needs could trigger liquidity stress system-wide.

The vacancy of the Chief Risk Officer role and management turnover in 2022 signaledoperational instability even before the crisis.

TRUE

The CRO vacancy and senior-finance turnover in 2022 suggested declining internal oversight capacity. Those gaps occurred precisely when market conditions were shifting, signaling organizational complacency or underestimation of emerging risk. Such governance gaps are classic early-warning indicators.

Venture-funding slowdowns and declining tech valuations in 2021-2022 were earlyindicators that SVB's concentrated client base could become a vulnerability.

TRUE

By late 2021, venture-funding slowed, tech valuations dropped, and startup burn-rates rose—all stressing SVB's deposit base and collateral values. These were unmistakable leading indicators for a bank so deeply tied to the innovation cycle. They were ignored because management interpreted them as temporary market noise.

Public optimism and favorable media coverage masked underlying exposure, reinforcinga feedback loop of complacency inside SVB.

TRUE

optimism reinforced an illusion of safety. That positive feedback loop discouraged questioning and created what behavioral economists call "success bias": the belief that past outperformance proves future stability.

SVB's original competitive advantage in the 1980s was primarily based on

providing early-stage financing to firms overlooked by traditional lenders

SVB's "high-touch" service model was designed chiefly to

build sticky relationships with founders and venture funds

During 2019-2021, SVB's deposit surge was largely driven by

venture-fund inflows and startup fundraising proceeds

Which scenario best illustrates concentration risk at SVB?

A sudden withdrawal by a few large venture-capital firms causes simultaneousliquidity stress and loan defaults

A key weakness of SVB's business model compared with typical commercial banks was its

dependence on uninsured, non-core deposits

Which statement best describes how accounting treatment delayed recognition of risk?

Unrealized losses on HTM securities did not affect regulatory capital ratios

The decision to allow interest-rate hedges to expire after 2020 reflected

an intentional shift toward higher risk tolerance in exchange for yield

Which of the following best explains why SVB appeared "safe" before 2021?

Its credit metrics and earnings masked unrecognized market risk

What does the CAMELS framework emphasize that helps explain regulatory complacencytoward SVB?

A heavier weighting on credit and capital adequacy rather than duration exposure

Which non-financial factor most contributed to management overconfidence?

Reinforcement of success by media and peer comparisons

In 2022, what early market indicators should have raised concern about SVB's securities portfolio?

Stable long-term rates and narrowing spreads

Which combination best captures the feedback loop leading to complacency?

Strong ratios → positive press → reinforced trust → weaker scrutiny