As Silicon Valley Bank deteriorated late last year and regulators began internally flagging flaws in its risk management, the lender opened up the credit spigot to one group: insiders.

Loans to officers, directors and principal shareholders, and their related interests, more than tripled from the third quarter last year to $219 million in the final three months of 2022, according to government data. 

That’s a record dollar amount of loans issued to insiders, going back at least two decades.

The surge in loans to high-up figures may draw scrutiny as the Federal Reserve and Congress investigate the breakdown of Silicon Valley Bank, the biggest U.S. bank collapse in more than a decade. The firm — one of three U.S. lenders to fall this month — collapsed after investors and depositors tried to pull $42 billion in a single day and it failed to raise capital to shore up its finances.

The government reports don’t disclose loan recipients or their purpose, and there have been no allegations of wrongdoing connected to the insider loans.

The Fed takes enforcement action, or refers violations to other regulators if it finds problems with these loans, said a spokesperson for the central bank, which oversaw SVB before its collapse. A representative for the Federal Deposit Insurance Corp., the receiver for the bank, didn’t respond to a request for comment.

Before regulators seized Silicon Valley Bank on March 10, it had a reputation as the go-to lender for tech companies and the venture capital firms that seeded them. The Fed’s interest-rate hikes last year took a toll on the lender, whose liquidity was tied up in longer-term government bonds that lost value in that environment. 

Under federal regulations meant to guard against banking executives getting preferential treatment, banks are only allowed to lend to insiders if they’re given terms similar to those provided to other customers. To help prevent conflicts, regulators require banks to publicly disclose the number of such loans and their value.

In its most recent proxy statement, SVB Financial Group, the parent company of Silicon Valley Bank before its collapse, said it made loans last year to related parties including “companies in which certain of our directors or their affiliated venture funds are beneficial owners of 10 percent or more of the equity securities of such companies.”

The bank issued the loans in the normal course of business, and with similar interest rates and collateral as other customers received around the same time, according to the filing. Still, loans in other categories such as real estate and commercial grew at a much slower rate — just over 3 percent — than those issued to insiders, according to data in separate government reports.

Rate Risks

The loans to executives and other senior figures surged as the bank’s weaknesses came to light. 

Late last year, Fed examiners identified a critical problem: the bank needed to improve how it tracked interest-rate risks. The firm had about $15 billion in unrealized losses at year-end on mortgage-backed securities that it loaded up when rates were lower.

The bank had also directed its lending business increasingly toward larger borrowers, including its private equity and venture capital clients. About 63 percent, or $46.8 billion, of the firm’s lending portfolio was comprised of loans to clients who received at least $20 million, according to SVB Financial Group’s annual report for 2022.

“Our loan portfolio has a credit profile different from that of most other banking companies,” the company said in the report. The firm added that “a significant portion of our loan portfolio is comprised of larger loans, which could increase the impact on us of any single borrower default.”