The Justice Department and Securities and Exchange Commission have opened investigations into the collapse of Silicon Valley Bank — the second-largest bank failure in U.S. history — and the actions of its senior executives, according to two people familiar with the matter who spoke on the condition of anonymity to describe the early-stage investigations.
Financial regulators closed the bank, popular among tech firms and start-ups, last week after a run on deposits, then another regional bank, New York-based Signature, on Sunday.
The twin failures sent shocks through investment markets and Congress, as the banking sector grapples with its first major scare since the 2008 financial crisis. After the Great Recession, lawmakers stiffened rules around asset-to-equity ratios and imposed harsh restrictions on the bets financial institutions could make with depositor dollars.
But a Republican-controlled Congress in 2018 relaxed many of those laws, cheered on by a chorus of financial institution executives — and Federal Reserve Chair Jerome H. Powell.
Powell has said the Fed will conduct its own inquiry into SVB’s failure. Sen. Elizabeth Warren (D-Mass.) said Tuesday that Powell should recuse himself from that probe, citing the Fed chair’s support of the 2018 regulatory rollback.
“Fed Chair Powell’s actions directly contributed to these bank failures,” Warren said in a statement Tuesday.
SVB chief executive Greg Becker was among those who encouraged lawmakers to roll back Wall Street regulations. Late in February, as his bank’s stock price began to dip, a trust he controlled sold $3.6 million in SVB shares, according to SEC filings.
A Justice Department spokesman declined to comment. An SEC spokesperson referred questions to a Sunday statement from Chair Gary Gensler, who said his agency would be “particularly focused” on “identifying and prosecuting any form of misconduct that might threaten investors, capital formation or the markets more broadly.”
The people describing the nascent investigations did not specify what types of evidence would be sought. But it is common in the aftermath of a major firm’s collapse for investigators to look for any indications of company officials misleading investors, or executives’ self-dealing to avoid financial losses.
The Wall Street Journal first reported the investigations Tuesday.
An SVB investor on Monday filed a civil lawsuit against the bank’s parent company, alleging that it violated shareholders’ rights by failing to disclose its exposure to the Federal Reserve’s interest rate hikes, which have inordinately hit the tech sector. The complaint, which seeks class-action status, also names Becker and SVB chief financial officer Daniel Beck as defendants.
The Biden administration on Sunday said the Federal Deposit Insurance Corp. would backstop all deposits, regardless of size, held by SVB and Signature Bank, which made large investments in cryptocurrency and digital assets.
The announcement appeared to soothe investors, as shares in regional banks rebounded Tuesday, outpacing a broader market rally and recovering some of the value they lost the day before. The KBW Nasdaq Regional Banking Index rose 2.1 percent Tuesday, though it remains down more than 5 percent for the week.
San Francisco’s First Republic Bank ― which claimed to have no direct relationship with the failed banks ― gained about 27 percent Tuesday after tanking 54 percent on Monday. Utah’s Zions Bancorp gained a more modest 4.5 percent Tuesday, while Dallas-based Comerica gained 4 percent.
Tuesday’s bounce-back allayed fears that Monday’s market jitters could spiral into something akin to the 2007-2008 financial crisis, in which a handful of “too-big-to-fail” financial institutions saw their losses spread from one to the next through a series of opaque, interconnected investments.
This time, SVB’s problems seem to be singular, as the bank made ill-timed purchases of the simplest and safest of assets, U.S. Treasury bonds.
The Fed’s interest rate tightening fueled a liquidity crunch among tech companies and start-up firms, driving them to draw on deposits made with SVB. But the bank had socked much of its cash in Treasury bonds that fell in value as higher yield notes came on the market.
As the pace of deposit withdrawals ramped up, SVB was unable to keep up with demand, causing it to falter.
The company’s new CEO, Timothy J. Mayopoulos, pleaded with clients on Tuesday to continue doing business with the bank as it utilizes emergency funds made available by federal officials to make depositors whole.
“The number one thing you can do to support the future of this institution is to help us rebuild our deposit base, both by leaving deposits with Silicon Valley Bridge Bank and transferring back deposits that left over the last several days,” said Mayopoulos, who joined the executive team of mortgage lender Federal National Mortgage Association, known as Fannie Mae, after it was taken over by the federal government in 2008.
Julian Mark, Tony Romm, Jeff Stein and David J. Lynch contributed to this report.