Board of Governors of the Federal Reserve System

Additional Topics

Federal Reserve Surveillance and Risk Analysis

The Federal Reserve System (FRS), including the Board of Governors and Reserve Banks, produces a wide range of surveillance, analysis, and reports related to supervised institutions and the broader financial system that are available to examiners and staff around the FRS. These reports provide context for bank-specific supervision by identifying industry trends and emerging risks.

Internal Surveillance Reports

Internal surveillance reports issued during 2022 and early 2023 highlighted several fundamental risks that were central to SVBFG's failure, including rising interest rate risk and liquidity risk, as well as more idiosyncratic risks to SVBFG such as its technology-sector focus and deposit concentration.⁹⁹

Several reports produced by the Board of Governors across portfolios cited rising interest rate risk throughout 2022. For example, the Board produces a broad Supervision Risk Report twice a year, which includes "top risks" and "watch list" risks. Interest rates and inflation became "watch list" issues in mid-year 2022 and "top risks" by the year-end 2022 report. In particular, the year-end 2022 report identified the potential impact of higher rates on asset values, liquidity and earnings, and credit conditions (figure 22).

The theme of higher rates was the focus of a special report on risks associated with unrealized losses on investment securities in June 2022. SVBFG was included in a list of banks with the highest ratios of unrealized losses relative to common equity tier 1 (CET1) capital and was larger than any bank ranked higher. Other reports during the second half of 2022 continued to warn of interest rate risk and added rising concerns around liquidity risk, more generally.

A separate set of reports focuses on the LFBO portfolio, and several included SVBFG-specific commentary. A 2021:Q4 report indicated SVBFG was in breach of internal policy limits for economic value of equity (EVE) at risk and a modest outlier on the benefit to EVE from a −100bps rate shock. During 2022, LFBO reports cited interest rate risk and liquidity risk as elevated and identified deposit competition and post-pandemic outflows as challenges for LFBOs including SVBFG, which was identified alongside others as experiencing outflows. Two reports noted risk-management concerns at SVBFG as well.

Finally, several reports produced by the FRBSF surfaced relevant risk themes. The materials highlighted the 12th District as having a higher share of non-maturity deposits (NMDs) than pre-pandemic and that the level of NMDs/total assets exceeded that of other Federal Reserve Districts. By 2022:Q4, it was reported that 12th District banks' outflows of NMDs were more rapid than in other Districts and that this may be explained by the higher exposure to NMDs exceeding $250,000. FRBSF also runs LFBO surveillance screens on a quarterly basis. SVBFG failed earnings screens from 2022:Q1 onwards and began failing the screen for liquidity as of 2022:Q4. Finally, a 2022:H1 monitoring report noted that SVBFG may face higher credit risk given its start-up focus, was ranked medium risk on unrealized losses/accumulated other comprehensive income (AOCI), and was viewed as high risk on deposit mix and competition.

Supervision Committee

The Federal Reserve Supervision Committee (SC) includes senior staff from the Federal Reserve Board and the officer in charge of supervision at each Reserve Bank and leads the execution of the Federal Reserve's supervisory responsibilities, including the identification of significant supervisory issues.

In late 2021 and then again in September 2022, the SC heard presentations around supervisory planning that included SVBFG. In September 2022, the committee heard the results of an LFBO foundational supervisory plan project. This presentation discussed the framework utilized for supervisory resource allocation decisions and noted SVBFG was assigned to cohort 4 (the lowest tailoring category), resulting in a lower level of examination resources.

The 2021 System Risk Report, reviewed by the SC, did not include interest rate risk or liquidity risk as "top risks" and was more focused on risks from the low interest rate environment at that time. By late 2022 and early 2023, however, the SC meetings featured liquidity and interest rate risk on numerous occasions. Presentations in September and October focused on risks from rising rates, including unrealized securities losses, negative tangible common equity (TCE), FHLB lending limits, and the supervisory approach to managing these issues.

Discussions around liquidity risk intensified in February 2023 and included a report on LISCC and LFBO high-quality liquid asset trends, RBO and CBO loan to deposit ratios, and discount window use; a roundtable discussion focused on tightening liquidity conditions, including liquidity profiles, liquidity risk management, the link between unrealized losses and non-core funding sources and held-to-maturity classifications, and the potential impact on minority depository institutions; a discussion of the effectiveness of supervision and examiner training related to elevated liquidity risk; and an update on inflation and rising rates moving from "watch list" to "top risks" and enhanced monitoring efforts in these areas.

Large and Foreign Banking Organization Management Group (LFBOMG)

A review of meeting documents from 2021, 2022, and 2023 showed several instances where SVBFG and related risks were discussed by the LFBOMG. This section focuses on horizontal perspective and broader risk issues.

The LFBOMG first discussed SVBFG in May 2021 when the group received an initial overview as SVBFG joined the portfolio. A discussion of the 2022 horizontal liquidity review (HLR), which did not include SVBFG, noted that internal liquidity stress testing was a heightened area of focus in light of removal or relaxation of the liquidity coverage ratio (LCR) for some banks in 2019.

In August 2022, the LFBOMG reviewed horizontal capital exam (HCE) and HCR results. SVBFG was part of the HCR that included current expected credit losses (CECL), Internal Audit, and several idiosyncratic elements (Risk Identification, Scenario Design, Capital Plan). The results for SVBFG were weaker than average with SVBFG described as "partially consistent with expectations" for CECL and Internal Audit and generally consistent with expectations for the idiosyncratic elements.¹⁰⁰ The material included a discussion around AOCI, but only for banks that were covered under the HCE, which did not include SVBFG because of its size.

The LFBOMG also held an August 2022 discussion on supervisory planning around proposed risks for 2023. Within a plan to cover the "top risks" of the macroeconomic and geopolitical environment, post-pandemic surge deposit flows and interest rate risk (IRR) management were listed as "watch list" items for focus within cross-portfolio discussion groups. It was noted in August 2022 that the System Risk Council would be including interest rate risk as a watch area for 2022.

In January 2023, the LFBOMG met to discuss supervisory assessments. Staff noted that SVBFG's Governance and Controls rating would remain at "Deficient-1," that SVB's CAMELS "S" rating would be downgraded for interest rate sensitivity, and the group had no concerns regarding these ratings. It was noted that the Liquidity rating could be up- or downgraded going forward, depending on the future path of deposit outflows. The notes also include a mention of a February 14, 2023, meeting with the Board on supervision topics (discussed below), including the impact of rising rates on AOCI and FHLB borrowing with specific reference to SVB.

Federal Reserve Board Briefing

The Board of Governors received an informational briefing on February 14, 2023, entitled "Impact of Rising Rates on Certain Banks and Supervisory Approach."¹⁰¹ This presentation highlighted the range of impacts of rising rates on banks, including rising net interest margins for most banks, but potentially large unrealized market value losses in investment securities for some. The report concluded that banks with large unrealized losses "face significant safety and soundness risks." The briefing concluded with a discussion of supervisory next steps, including conducting internal training and raising industry awareness through an "Ask the Fed" session and external articles.

Staff identified SVBFG as an example of financial risks including a discussion of SVBFG executing its CFP, a planned downgrade of SVB's CAMELS "S" sensitivity rating to "Less-than-Satisfactory-3," a supervisory MRA around IRR modeling, and heightened supervisory attention. SVBFG was chosen as an example of supervisory concerns at a large bank with substantial exposure to interest rate risk.

External Federal Reserve Risk Perspective

The Federal Reserve Board of Governors publishes a semiannual Supervision and Regulation Report each May and November to inform the public and provide transparency about its supervisory and regulatory policies and actions, as well as current banking conditions.

The May 2022 report assessed banking system conditions as strong, even as geopolitical tensions and associated risks were rising.¹⁰² Capital and liquidity were assessed as strong and ample, and the report noted technology and innovation-related risks as priorities.

The November 2022 report assessed the financial condition of banks as generally sound.¹⁰³ Expanding net interest margins were noted as a positive factor as interest rates rose, balanced by declining values of investment securities and the potential for rising credit risk associated with floating rate loans. A box on the "Effects of Securities Depreciation on Banks' Capital and Liquidity Positions" showed the impact of higher rates on securities valuations and the associated risks. Finally, the report noted that supervisors were focused on remediation of supervisory findings as well as monitoring the potential effects of the current economic environment on banks' operations and condition.

Federal Reserve Banks also periodically release information relating to top risks and areas of focus for supervision in their respective Districts. These assessments are not uniform across Districts and include presentations made to local bankers and banking associations, banking conference materials, speeches by senior supervisory officers, and periodic reports for use by the public and banking community. Given the range of formats, the level of detail provided on each risk varies considerably.

A review of this material shows that core banking risks such as liquidity, capital, asset quality, commercial real estate, and interest rate risk featured most prominently across Reserve Banks. The figure below reports the number of Reserve Banks where a publication cited a specific risk; for example, liquidity risk was included in documents published by seven separate Reserve Banks.¹⁰⁴ Secondary topics included crypto, earnings (related to compressing margins), cyber risk, and balance sheet trends (figure 23).

Conclusions

This review of the Federal Reserve surveillance and analysis shows a broad-based approach that considers a wide range of traditional risks across portfolios. Overall, this analysis appears largely fit for purpose and consistent with the mandate of the Federal Reserve with a strong appreciation of how macroeconomic and financial topics can impact traditional banking risks. The issues most relevant to the failure of SVBFG—rising interest rates, impact on securities valuation, and liquidity pressure—were identified, analyzed, and escalated. The reviews did not consider the potential for extreme tail events like a rapid outflow of deposits or the systemic implications of broad runs on uninsured deposits.

It is unclear how these assessments actually informed the supervisory process or outcomes. The discussion with the Board of Governors on February 14, 2023, for example, was informational in nature rather than focused on the significant risks to safety and soundness or systemic risks.

Incentive Compensation

Supervision of performance management and incentive compensation (PM/IC) programs of large financial institutions is typically covered as part of the evaluation of a firm's board effectiveness. This can include governance exams with a board effectiveness component or horizontal examinations of board effectiveness. Supervisors may also conduct targeted exams to review the PM/IC programs at large firms. Additionally, incentive compensation programs are covered under compliance exams (to ensure misconduct or policy violations are being reflected in compensation) and material business line exams.

The overarching assessment of board effectiveness at a firm informs its overall Governance and Controls rating.

Supervisory Expectations for Incentive Compensation Policies

Examiners use several supervisory guidance documents for supervision of performance management and incentive compensation, assessing if a firm's programs pose safety and soundness concerns. The Board, together with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), has outlined its supervisory expectations for incentive compensation arrangements in the 1996 Interagency Guidelines Establishing Standards for Safety and Soundness (1996 Safety and Soundness Guidelines) and the 2010 Interagency Guidance on Sound Incentive Compensation Policies (2010 Incentive Compensation Guidance). Under the 1996 Safety and Soundness Guidelines, the Board has noted that compensation involving amounts paid that are "unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder" is prohibited as an unsafe and unsound practice.¹⁰⁵

Similarly, the 2010 Incentive Compensation Guidance was designed to help ensure that incentive compensation policies do not encourage irresponsible risk-taking and are consistent with safe and sound banking practices.¹⁰⁶ The 2010 Incentive Compensation Guidance applies to all Board-supervised firms and is based on three main principles.¹⁰⁷ First, a firm's incentive compensation arrangements should not incentivize employees to take risks that are beyond the firm's ability (or willingness) to effectively identify and manage. Second, incentive compensation arrangements should be compatible with effective risk management and controls. Finally, incentive compensation arrangements at firms should be supported by strong corporate governance practices, including active and effective oversight by boards of directors.

In addition to the 1996 Safety and Soundness Guidelines and 2010 Incentive Compensation Guidance, supervisory expectations regarding incentive compensation governance arrangements and practices for certain institutions are contained in the Board's Supervisory Guidance on Board of Directors' Effectiveness.¹⁰⁸

The Board also has issued regulations with specific requirements for the compensation of individuals performing certain roles at Board-regulated institutions.¹⁰⁹ Further, the Board, together with five other federal financial regulatory agencies, issued proposals in 2011 and 2016 to implement the incentive compensation provisions in section 956 of the Dodd-Frank Act. An implementing rule, however, has not yet been finalized.

Coverage of Incentive Compensation at SVBFG

The RBO and LFBO exam teams did not conduct a dedicated examination of PM/IC practices at SVBFG since 2017. However, the exam teams covered PM/IC indirectly through governance examinations. The RBO exam team conducted a Corporate Governance Exam in 2019,¹¹⁰ and the LFBO exam team conducted a Governance and Risk Management Exam in 2022.¹¹¹ During the 2022 exam, the exam team identified major weaknesses in SVBFG's incentive compensation program and board oversight of the program that had not been uncovered in the 2019 exam, and this resulted in the issuance of an MRIA on board effectiveness.

Supervisors concluded that SVBFG's incentive compensation decisions were primarily based on SVBFG's financial performance, with minimal to no linkage to risk management and control factors. For example, the team found that "risk management deficiencies, identified by independent risk functions or through regulatory examinations, have not been meaningfully considered by [SVBFG's] incentive compensation decisions."¹¹² In relation to the 2021 year-end self-assessment of several executives—including the chief executive officer (CEO) and chief financial officer (CFO)—compensation and incentives remained unchanged with their cash bonuses and equity awards being based on return on equity (ROE), allowing for certain adjustments, and total shareholder return (TSR) despite the executives not achieving the objective of building out the risk-management program to LFI standards.¹¹³

The LFBO exam team also noted weaknesses regarding the board Compensation & Human Capital Committee's (Compensation Committee) oversight of the incentive compensation program. The Compensation Committee did not receive the appropriate performance evaluation documentation that the CEO used to inform compensation recommendations. The Compensation Committee relied solely on the CEO's recommendations regarding operating committee executive compensation.¹¹⁴ Supervisors' interviews with the Compensation Committee chair indicated that the Compensation Committee decided not to reduce incentive compensation, despite the known weakness in the enterprise risk-management program, fearing this would lead to increased attrition of senior executives due to executives' compensation already being lower than peer firms.

The May 31, 2022, MRIA required SVBFG to develop "mechanisms to hold senior management accountable for meeting risk management expectations.¹¹⁵ In response, SVBFG's board committed to enhancing its incentive compensation program and performance management process to better hold senior management accountable for risk-management expectations. In the proposed plan submitted in August 2022, SVBFG's board outlined proposed enhancements to the PM/IC program, including incorporating goals related to risk management and risk metrics into the performance evaluation process and incentive compensation decisions.

In January 2023, the Compensation Committee of SVBFG's and SVB's boards of directors approved stock incentive bonuses to executives and employees for 2022 performance. The Compensation Committee also approved cash incentive bonuses to senior executives for their 2022 performance. Despite SVBFG's deteriorating condition and SVBFG's negative cash balance, cash bonuses were paid to several SVBFG executives and staff for their 2022 performance on March 10, 2023, despite the failure of SVB that day.

When SVBFG failed, it was in the process of redesigning its incentive compensation program in response to supervisory criticisms and identified deficiencies in the 2022 LFBO governance and risk-management exam. SVBFG's new Chief Human Resources Officer and the Compensation Committee of the board of directors had begun approving action items to implement reforms to the incentive compensation policies and were in the preliminary stages of developing procedures to correct the identified issues.

Conclusions

The incentive compensation arrangements and practices at SVBFG encouraged excessive risk taking to maximize short-term financial metrics. SVBFG's compensation practices also did not adequately reflect longer-term performance, nonfinancial risks, or unaddressed audit or supervisory issues. Nor did they include sufficient opportunities for SVBFG's internal control functions to provide feedback or challenge. Stronger or more specific supervisory guidance or rules on incentive compensation for firms of SVBFG's size, complexity, and risk profile—or more rigorous enforcement of existing guidance and rules—may have mitigated these risks.

Assessment of the Federal Reserve Approval of SVB Financial Group Applications

Background

The Federal Reserve, in its role as a primary federal regulator, reviews applications submitted by a wide range of financial institutions for approval to undertake various transactions, including mergers and acquisitions (M&A), and to engage in new activities. The Federal Reserve reviews and acts on proposals filed under a wide range of provisions of law.

Applications are filed with the responsible Reserve Bank. The Board has delegated authority to the Reserve Banks to act on most applications that do not raise significant policy, legal, or supervisory issues.¹¹⁶ The Board acts on proposals that raise significant policy, legal, or supervisory issues or otherwise do not meet the criteria for delegation established by the Board.

Overview of SVB Financial Group and SVB Applications Activity 2018–23

During the review period, the Federal Reserve approved an application filed by SVBFG under the Bank Holding Company Act (BHC Act) to merge with Boston Private Financial Holdings, Inc. (Boston Private). The Federal Reserve also acted on three prior notices under Regulation K to make foreign investments and 69 requests for prior approval to make public welfare investments filed by SVB under Regulation H. Given the nature of public welfare investments, they are not considered part of the internal review.¹¹⁷ SVBFG and SVB also submitted a request for an exemption from Regulation L to allow a prohibited management interlock that was ultimately withdrawn. Because Greg Becker, CEO of SVB and president and CEO of SVBFG, also served as a director on the board of the FRBSF starting on January 1, 2019, the three Regulation K prior notices (and the public welfare investments) were not eligible to be acted upon by FRBSF and instead were acted on by the Secretary of the Board (table 10).¹¹⁸

Table 10. Applications related to SVBFG and SVB, 2018–23

Filing to Merge with Boston Private Financial Holdings, Inc.

For applications filed under section 3 of the BHC Act¹¹⁹ and the Bank Merger Act (BMA),¹²⁰ the Federal Reserve must assess several statutory factors, including factors such as competitive effects; financial and managerial resources; convenience and needs of the community; anti-money laundering issues; and the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the U.S. banking or financial system.

On February 24, 2021, SVBFG filed a section 3 application requesting approval to merge with Boston Private Financial Holdings, Inc. (Boston Private), a bank holding company with approximately $10.5 billion in total consolidated assets, and thereby indirectly acquire Boston Private Bank & Trust Company (BP Bank). SVB also requested approval to merge with BP Bank.¹²¹ The Board of Governors was required to act on the proposal because it exceeded the delegation criteria for financial stability.¹²² The Board approved the proposal on June 10, 2021.

The Board's Division of Research and Statistics (R&S) is responsible for completing the financial stability analysis related to applications acted on by the Board. R&S staff concluded that the proposed merger would not result in meaningfully greater or more concentrated risks to the financial stability of the United States.

The Board's Division of Supervision and Regulation (S&R) is responsible for assessing the financial and managerial considerations and future prospects for applications acted on by the Board. In its evaluation of this proposal, S&R mergers and acquisitions staff's analysis focused on the supervisory record and financial condition of SVBFG and Boston Private and their subsidiary banks and the pro forma financial condition and financial projections of the combined organization. SVBFG was rated as "Satisfactory-2" at the time of the application.

The S&R mergers and acquisitions recommendation memorandum states that SVBFG transitioned from the RBO portfolio to the LFBO portfolio in the first quarter of 2021. There is no assessment of the bank's readiness to move into the LFBO portfolio or the planned supervisory strategy.

Regulation K Notices

For prior notices to make foreign investments under Regulation K, the investor "shall at all times act in accordance with high standards of banking or financial prudence, having due regard for diversification of risks, suitable liquidity, and adequacy of capital.¹²³

SVB submitted several notices under Regulation K for foreign investments. These included (i) a $35 million investment in August 2019 and a $39 million investment in January 2021 in SPD Silicon Valley Bank Co., Ltd, Shanghai, China and (ii) a $1.8 billion investment in October 2022 in SVB UK Ltd, London, England. The supervisory CPC highlighted supervisory issues that SVB needed to remediate at the time of the October 2022 notice and recommended that it not be approved. The Board LFBO analyst had a similar recommendation due to recent liquidity risk management issues and outstanding information technology and European exchange rate mechanism issues. Ultimately, however, staff decided that there were not sufficient grounds to object to the notice.

Tying

SVB's loan agreements with certain borrowers required them to use other services of SVB or an SVB affiliate, including maintaining their primary operating deposit accounts with SVB.¹²⁴ The agreements did not, however, prohibit these borrowers from obtaining similar accounts or services from other providers. The types of covenants included in SVB's loan agreements are often seen as prudent credit risk management tools because they provide lenders insight into a borrower's financial condition and ability to repay a loan. As part of its standard supervision, Federal Reserve staff reviewed SVB's loan portfolio. During general discussions with SVB of its loan agreements, staff became aware of the requirement to use other services of SVB or SVB's affiliates. Federal Reserve staff is not aware of any requirements SVB imposed on its borrowers to obtain services other than those identified in this report.

Banking law generally prohibits "tying arrangements," under which a bank extends credit or provides other services on the condition or requirement that the customer obtain some other product or service from the bank or an affiliate.¹²⁵ However, the law permits a bank to condition the availability or price of any product on a requirement that the customer obtain a "loan, discount, deposit, or trust service" from the bank or an affiliate of the bank.¹²⁶ SVB's arrangement qualifies for this exception.¹²⁷

Volcker Rule

The Volcker rule generally prohibits any banking entity from engaging in proprietary trading (the proprietary trading provisions) or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (covered funds) subject to certain exemptions.¹²⁸ The Board, OCC, FDIC, Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) share authority for implementing the Volcker rule and issued a final rule implementing these provisions in December 2013 and amendments in 2019 and 2020.¹²⁹

One of the main purposes of the Volcker rule is to prohibit banking entities from engaging in "high-risk proprietary trading," which includes "leveraged, short-term speculation."¹³⁰ As discussed above, SVBFG's losses arose from SVBFG's long-term holding of long-duration securities, the very "long-term, multi-year investments" that were excluded from the scope of the Volcker rule. Moreover, the vast majority of SVBFG's securities were U.S. Treasuries and agency-issued or guaranteed mortgage-backed securities that are excluded from the prohibition on proprietary trading.¹³¹ The activities that led to SVBFG's failure were not the activities that the Volcker rule was intended to address.

Other provisions of the Volcker rule likely were relevant to the operations of SVBFG. For example, SVB hedged its interest rate exposure in 2021 by holding certain financial instruments. These financial instruments were held for approximately one year and thus would have been presumed to not be subject to the proprietary trading provisions.¹³² Similarly, SVBFG held investments in certain venture capital funds that may have been covered funds subject to the restrictions of the Volcker rule. The Volcker rule excludes "qualifying venture capital funds," as defined by the SEC regulations from the restrictions of the covered fund provisions.¹³³

SVBFG was presumed to be in compliance with the Volcker rule because it had limited trading assets and liabilities, and SVBFG had no obligation to affirmatively demonstrate compliance with the regulation on an ongoing basis.¹³⁴ This presumption, along with the reduced recordkeeping requirement for SVBFG's fund investments,¹³⁵ resulted in limited documentation that Federal Reserve staff could review to determine whether SVBFG would have been in compliance with the Volcker rule or met the requirements of any applicable exceptions, including without the presumption of compliance or absent the changes to the regulations.¹³⁶

 

References

 

 99. Surveillance reports may contain confidential supervisory information related to other institutions that are continuing to operate. Return to text

 100. SVBFG 2022 LFBO Horizontal Capital Review Supervisory letter, August 19, 2022. Return to text

 101. Board of Governors of the Federal Reserve System, "Impact of Rising Rates on Certain Banks and Supervisory Approach," S&R Quarterly Presentation, February 14, 2023. Return to text

 102. Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Governors, May 2022), https://www.federalreserve.gov/publications/files/202205-supervision-and-regulation-report.pdf. Return to text

 103. Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Governors, November 2022), https://www.federalreserve.gov/publications/files/202211-supervision-and-regulation-report.pdf. Return to text

 104. Where a Reserve Bank provided multiple published documents and the same risks were included, only one instance of the risk is recorded for purposes of the figure. This reflects material from 10 Reserve Banks. Two Reserve Banks did not publish risk information. Return to text

 105. 12 C.F.R. pt. 208, app. D-1. Return to text

 106. Guidance on Sound Incentive Compensation Policies, 75 Fed. Reg. 36,395 (June 25, 2010), https://www.federalregister.gov/documents/2010/06/25/2010-15435/guidance-on-sound-incentive-compensation-policies. Return to text

 107. Guidance on Sound Incentive Compensation Policies. If incentive compensation payments are too closely tied to short-term revenue or profits, without appropriate adjustments for the risks associated with the business generated, the potential for the incentive compensation arrangement to encourage irresponsible risk-taking may be strong. In addition, incentive compensation arrangements should be implemented so that actual payments vary based on risks or risk outcomes. Return to text

 108. Board of Governors of the Federal Reserve System, "Supervisory Guidance on Board of Directors' Effectiveness," SR letter 21-3 (February 26, 2021), https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm. Return to text

 109. See, e.g., 12 C.F.R. § 252.22(b)(3)(i); 12 C.F.R. § 248.4(a)(2)(v). Return to text

 110. SVBFG Target Corporate Governance/Global Risk Management Supervisory letter, November 19, 2019. Return to text

 111. SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022. Return to text

 112. SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022. Return to text

 113. The only executive who received a reduction in pay in the 2021 performance year due to not meeting risk-management expectation was the chief risk officer (CRO). Return to text

 114. Based on review of the Compensation Committee package, the board received the CEO's compensation recommendations without any supporting documentation (e.g., performance evaluation results). Return to text

 115. SVBFG and SVB Governance and Risk Management Target Supervisory letter, May 31, 2022. Return to text

 116. Reserve Banks may consult with Board staff on proposals that raise policy, legal, or supervisory issues prior to acting. In instances where a Reserve Bank could act on an application except for the fact that the Reserve Bank may not act because a director, senior officer, or principal shareholder of any company or bank involved in the transaction is a director at that Reserve Bank, the Board has delegated authority to the Secretary of the Board to act on these applications. See 12 C.F.R. § 265.5(c)(2). The Board also has delegated authority to act on certain types of applications to Board staff. Return to text

 117. Public welfare investments made in compliance with Regulation H, 12 C.F.R. § 208.22, generally are not viewed as risky and often provide tax benefits to the banks involved. Further, these investments are considered beneficial to communities and individuals in underserved areas. SVB's aggregate public welfare investments represented less than 10 percent of the bank's capital and surplus. Return to text

 118. In cases where the Reserve Bank may not act because of a Reserve Bank director interlock, the Secretary of the Board has delegated authority to take actions that would otherwise have been acted upon by the Reserve Bank. 12 C.F.R. § 265.5(c)(2). Return to text

 119. 12 U.S.C. § 1842. Return to text

 120. 12 U.S.C. § 1828(c). Return to text

 121. SVB also requested approval to establish branches at the locations of BP Bank's branches and to change the general character of its business to engage in trust activities. Return to text

 122. The delegation criteria require Board action for any proposal where (1) the consolidated assets of the pro forma organization equal or exceed $100 billion, and (2) the consolidated assets of the target exceed $10 billion. Return to text

 123. 12 C.F.R. § 211.8(a). Return to text

 124. Some borrowers also were required to maintain their operating and securities accounts with SVB and to obtain asset management, letters of credit, and cash management services from SVB or an SVB affiliate. Return to text

 125. See 12 U.S.C. § 1972(1)(A)–(B). Return to text

 126. 12 U.S.C. § 1972(1)(A); 12 C.F.R. § 225.7(b)(1). Return to text

 127. See Board of Governors of the Federal Reserve System, "Legal Interpretations: Frequently Asked Questions about Regulation Y," last updated December 30, 2021, https://www.federalreserve.gov/supervisionreg/legalinterpretations/reg-y-frequently-asked-questions.htm. Return to text

 128. 12 U.S.C. § 1851. Return to text

 129. Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed. Reg. 5,535 (January 31, 2014), https://www.federalregister.gov/documents/2014/01/31/2013-31511/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with; Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 84 Fed. Reg. 61,974 (November 14, 2019), https://www.federalregister.gov/documents/2019/11/14/2019-22695/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with; Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 85 Fed. Reg. 46,422, 46,442–8 (July 31, 2020), https://www.federalregister.gov/documents/2020/07/31/2020-15525/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with. Return to text

 130. See 156 Cong. Rec. S5894 (daily ed. July 15, 2010) (statement of Sen. Merkley), https://www.govinfo.gov/content/pkg/CREC-2010-07-15/html/CREC-2010-07-15-pt1-PgS5870-2.htm. Return to text

 131. Both the statute and all versions of the Volcker rule regulations exclude from the prohibition on proprietary trading purchase or sale of Treasury securities, certain agency-issued MBS, and state and municipal securities. See 12 U.S.C. § 1851(d)(1)(A); 12 C.F.R. § 248.6(a). Return to text

 132. See 12 C.F.R. § 248.3(b)(4). This change reversed the presumption in the 2013 rule, which provided that positions held for fewer than 60 days were presumed to be subject to the trading provisions. 12 C.F.R. § 248.3(b)(2) (2018). Return to text

 133. Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 85 Fed. Reg. 46,422, 46,442–8 (July 31, 2020); 12 C.F.R. § 248.10(c)(16). These revisions became effective October 1, 2020. Return to text

 134. See 12 C.F.R. § 248.20(g). SVB had less than $1 billion in trading assets and liabilities. Return to text

 135. See 12 C.F.R. § 248.20(e) (imposing recordkeeping requirement only for firms with the largest amount of trading). Return to text

 136. SVBFG sought and received an extension of the date by which the firm was required to conform or divest legacy illiquid fund investments. See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170607a.htm. See also https://www.federalreserve.gov/newsevents/pressreleases/bcreg20161212b.htm. There is no evidence that these fund investments had a material impact on SVBFG's financial condition. Return to text