Baruch College’s business school namesake, Larry Zicklin, discussed the events that led up to the collapse of SVB Financial Group in the latest installment of his webinar series on April 18. 

For the webinar — titled “Silicon Valley Bank: The Canary in the Coal Mine?” — the Baruch alumnus was joined by Paquita Davis-Friday, the interim dean of the Zicklin School, and Linda Allen, a finance professor in the Bert W. Wasserman Department of Economics and Finance.

The three faculty members talked about warnings from the bank’s collapse, KPMG’s clean bank audit and the implications of the accounting firm’s actions on the broader economy.​​

SVB’s collapse created a ripple effect throughout the banking sector with more regional banks following suit and being overtaken by federal regulators.

Allen recalled the financial crisis that occurred between 2007 and 2008 and pointed out what is happening now is not the same as what happened then.

“What happened in 2008 was, there were not enough ‘banks B, C, D and E’ to absorb all of the losses,” Allen said. “That’s when we have systemic risk, where there are not enough solvent institutions to pick off the assets and liabilities of the insolvent. That’s not what we’re at now. That’s why I believe we have created a crisis we’re at risk [is] soon to be.”  

Zicklin recalled that SVB had 94% of its deposits insured and asked Allen whether SVB should have understood this risk.

Allen cited that the subsidiary Silicon Valley Bank was in a liquidity risk, but it was not the core issue. She said that the “risk management was inadequate at SVB Bank.”

“Look, I don’t know the management there,” Allen added. “I can’t read their minds, but I believe they felt the Fed was going to be ending its tightening positions and was going to sort of keep interest rates pretty level. They would have gotten away with it and actually made a ton of money.”

The Ticker previously reported that SVB did not have a risk management team or a chief risk officer until January, two months before the financial institution collapsed. Zicklin noted that “the auditors had to have seen this.”

Banks have two types of assets: marked-to-market assets and held-to-maturity assets.

Marked-to-market assets have values that fluctuate based on current market conditions.

Held-to-maturity assets are purchased and owned until maturity. Maturity refers to the date when the final payment is due, otherwise, it will cease to exist. These assets remain constant throughout accounting periods, and the main advantage is that banks could utilize them to conceal incurred losses.

SVB had been transferring its assets to the held-to-maturity category since 2020. By 2022, nearly 44% of its assets were in the classification, according to The Private Office.

“The auditors are to provide an opinion as to whether the financial statements present fairly, in all material respects, the financial position of the company as of the financial statement date,” Davis-Friday said in regard to KPMG’s audit of SVB.

An accounting professor, Davis-Friday said that addressing readers with predictions is a difficult matter. Once auditors start forecasting, they no longer retain their role. In fact, that wouldn’t be the auditor’s responsibility or role.

The difficulty of predictions made by critical risk was trivialized, and Allen added that the auditor would get sued for revealing predictions.

As small banks lose deposits and bigger banks gain deposits, Allen commented on the government’s growing role in the banking sector.

“The Fed and the federal government have essentially given a put to the private sector,” Allen explained. “Then, okay, you have a bad outcome, sell it to us at par value.”

At the end of the discussion, Zicklin answered the question posed by the title of the webinar — is SVB the “canary in the coal mine?”

“Yeah, I think Silicon Valley Bank, Signature Bank and First Republic Bank is the canary in the coal mine,” Zicklin said. “But, it also depends on the level of interest rate because if interest rates continue to go up, we’ll see some casualties that we don’t know about.”

Editor’s Note: Vincent Perretti, who co-wrote this article, is a member of the Baruch Accounting Society. He had no part in writing specifically about KPMG.