Financial R&R: Silicon Valley Bank (SVB) - Rebuilding Confidence in the Banking Industry
By Alliant / March 27, 2023
Ron Borys and Ryan Farnsworth are joined by guests, Steve Shappell and David Finz, to continue the discussion around the turmoil which has hit the banking industry over the past two weeks.
Despite some easing in the market, there are mounting concerns surrounding the lack of confidence in the banking industry, potential for litigation against bank executives, and the need for reassurance and diversification to help rebuild confidence. In addition, David also warns organizations about possible phishing and other cyber threats that can arise during this time of distress.
Welcome to Financial R&R, a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.
Ron Borys (00:13):
Welcome everyone, this is Ron Borys, I'm here with Ryan Farnsworth, this is the Financial R&R podcast. We thought that it'd be important during this ever-evolving time to continue to stay connected to you all, with regards to what's going on, particularly when it comes to the banking industry and the latest news and for lack of a better term, crises, that seems to have hit the industry. With Ryan and I, we have Steve Shappell, who is a regular on the Financial R&R. We've also asked David Finz to join us today, David is a frequent guest as well. Clearly, there's a lack of confidence right now, that somebody, whether it's the Fed or others, need to step up and reassure people and get that level of confidence back. But, I think there's just going to be some diversification that occurs. So, just thought it'd be a great idea to give an update on what we've seen, some observations, some takeaways from some of the conversations we've been having with our bank clients. So Steve, why don't you start. Obviously, it's a really busy time, talking to a lot of lawyers about what's going on. What have you seen over the last few days?
Steve Shappell (01:11):
A lot of inquiries, Ron. We advise and consult far more than we transact. So, we are all doing a lot of calls with our clients about what this all means. So a lot of inquiries, a lot of concerns. One of the interesting things that I've been following that we touched on, on the previous podcast, was the odd dilemma that our clients are faced with when they go into liquidation, the policy automatically converts to runoff, which means that there's no coverage for ongoing wrongful acts, once the "change of control" is triggered, which is often triggered by bankruptcy and certainly triggered by liquidation. I think a hearing in New York this week, reinforced the concerns that we were talking about and expressing, where the ongoing operations, their investment activities and their venture capital operations, which are not part of the bankruptcy, their non-debtor operations had to go to court and ask for a hundred million of capital to be freed up.
And that's concerning, right? Because it's not a given. On top of that, as we talked about, there's a significant concern that, are those ongoing operations protected for their acts, errors and omissions going forward? So that's a big deal. The other thing that you mentioned, the litigation's coming in against directors and officers. I'm very alarmed by a headline I saw, where president of the United States is asking Congress to hold these executives of banks liable. That's scary stuff, and we're seeing the litigation come in. Again, it's very concerning because this is a situation where there will be most certainly a lack of ability to indemnify these directors and officers who are going to be targeted. So we've got the Credit Suisse ADR litigation and we have Signature and SVB litigation coming in against the directors and officers. We're following this really closely and we'll continue to report on this, but as we predicted, the litigation's coming in with a massive bullseye on directors and officers in a non-indemnified setting.
Ron Borys (03:07):
It's so interesting, the politicizing of this stuff. I know bank executives are generally viewed as wealthy people, but what most people don't realize is most of their wealth is tied up in the stock of the banks. So when you're a banker that's got a senior role and you have options, and your options now have gone down 50%, 60%, 70% in the last two or three weeks. You're not as wealthy as one might think. It's very unfortunate because I think while the role of these political figures should be to bring calm and strength and confidence, and I don't know, maybe it's because we're coming up on an election year, it just seems like the politicizing of all of this, it's not helping the cause at all.
Steve Shappell (03:48):
Yeah, agreed. Then on top of it, we're lucky enough to have David on this call. The fallout from this is scary because there is a lot of concern, there's a lot of panic going on and that leads to potential exposures from phishing and other activities. So David, why don't you talk a little bit about all the advising and consulting you're doing and things you're seeing and what's keeping you awake at night?
David Finz (04:10):
Thanks Steve. One of the things that we're on the lookout for is anytime that you have an industry that's in distress, I mean clearly right now there are portions of the banking sector that are under considerable stress. This creates an opportunity for threat actors to come in and capitalize on the situation. So, we've been advising clients to be on the lookout for very targeted phishing emails or social engineering attacks where folks are impersonating vendors, particularly IT service providers. You may be on the receiving end of an email claiming, "we were previously depositors with 'such and such bank', we've now updated our payment or wire instructions. So going forward, please be sure to remit your monthly invoice here", and that winds up being a phishing attempt, capitalizing on the situation, where somebody is able to impersonate a vendor. You as the customer of that vendor misdirect the payment and then the vendor comes back and says they never received it. So, that's a classic social engineering attempt. There are other types of cyber attacks that we need to be on the lookout for - fake social media accounts, emails impersonating CEOs or you know, other C-level executives requesting either money transfers or sensitive types of data. So, these are the concerns that we have and that's obviously not confined to folks in the banking or the IT sectors. It's pretty much any company that uses these services.
Ron Borys (05:42):
Yeah, it's funny, we've long said that banks for all intents and purposes have become FinTech type companies. When you think of runs on the bank in prior times of despair, it involved people lining up outside banks or ATM machines to get their money out. Now, it's people just logging onto apps and hitting a transfer button. It's pretty remarkable how quickly the money can move in the world that we live in. Again, while we've all become accustomed to the convenience and ease of that, there's also things that we just need to be extra sensitive to and vigilant of. Candidly, David, I didn't even think of that until you brought that into my mind. So, really fortunate to be able to have someone like you on our team always thinking about these types of things and trying to help our clients find that more rewarding way to manage risk.
So Ryan, thinking about, we're now officially into spring. We're getting into that spring renewal cycle with underwriters. The big question everybody has is what kind of event is this going to be on the market? Are banks still insurable? If I'm a CEO, CFO, of a bank and I budgeted for my D&O insurance this year, thinking that going into this year the market had softened and maybe I was going to save some money, do we think this event has the ability to move the market as a whole? Let's talk a little bit about that.
Ryan Farnsworth (06:56):
Yeah, if you're a bank, you should absolutely be thinking about how it's going to impact your renewal because there's no doubt that it will in some form or another. As we've had conversations with clients, as we've had conversations with underwriters during the past couple of weeks, it's been pretty remarkable to see that they share a similar perspective that the Fed did, when they came out with their recent comments about their interest rate hike. It really showed that we're not that concerned about the broader economy or, in the names of the underwriters, in the broader insurance market. We believe that as of now, it's been a few select banks that we have clearly been concerned about and we need to implement other underwriting guidelines. As we think about what the underwriting guidelines are for upcoming renewals, banks will be challenged more than other classes of business for sure, and banks should be thinking about how they approach renewals and having strategic conversations with their brokers before they even get in front of the underwriters.
It's critical that before you go to the insurance market for cyber risk, in particular, that you determine what's your insurability and what are the different factors that underwriters are going to be looking at? Now we almost need to take that same strategy that we've been implementing for cyber risk over the last couple of years and put that on the banking side and say, what do we need to strategically go to the market with in terms of our approach to risk management, in terms of our approach and communication with investors? Have we had any runs on the bank recently that we need to be prepared to address? And I think there's a lot that will come out in the coming months about what has actually happened at some of these banks that will also impact underwriting and go through the process later in the year as well.
The other thing that's a really interesting point that we think about and want to advise our clients about is that the underwriters, yes, they've been fairly static, I will say when it comes to banks and how they're approaching those banks. But, it certainly appears that they're going to be even more aggressive on other classes of business within the financial institution sector, whether that be asset management, private equity, insurance companies. They can underwrite to those certain risks and understand that there may be a little bit of a pause or maybe there won't be as much of an appetite to go after banks, as there was earlier this year. They're going to be more aggressive and more competitive to deploy their capacity in other sectors of the business. So from a broader perspective, we still don't see any hardening of the insurance market, even though there may be a heightened focus in the banking sector.
Ron Borys (09:29):
One of the things I think is really important are risk management controls, governance. When you look at what's come out already when it comes to Silicon Valley Bank and Signature, there were clearly some specific issues there. Steve, I'm sure you've read those complaints. Those are going to be actual alleged wrongful acts, right? Breaches of duty, breaches of loyalty, breaches of care, which result in massive losses in shareholder value in bankruptcies. But, you look at the headline today of Pacific Western Bank, reporting that their depositors are down, and again, people move money in and out of banks every day. Clearly the stock now is falling as a result of that news. Is that a wrongful act? At the end of the day, it's just going to be really interesting to see how the plaintiff's bar decides to try to bring litigation against the banking industry for things that, in many ways, are not wrongful acts, they are things that are completely out of their control.
Steve Shappell (10:27):
Yeah, it's a great point Ron, and these policies are very bespoke policies, right? No two policies are the same. I think one of the takeaways here is to reach out to us early and often, with inquiries. We spend a lot of time every day on looking at fact patterns and situations and letters and helping to advise, consult and guide. What can we do with this information? Do we want to send this in as a notice of circumstance, so as to preserve the coverage and give some comfort? The suggestion, the advice here is reach out to us. We do this for a living. The people at these financial institutions who are getting pummeled with this information and these dilemmas don't do this for a living. So, reach out to us early and often and let us help, and advise and consult to make sure that we maximize performance of these policies.
Ron Borys (11:20):
I think the takeaway or the thing I think we need to emphasize to folks is, a stock drop alone without some type of corresponding wrongful act is not a claim. People may allege it's a claim and the plaintiff's bar will certainly try to find every way they can to get that claim to survive a motion to dismiss because that's how they pay their bills, unfortunately. But we've seen this happen over time, where industries have been impacted by the event of a company that has certain issues and anybody who's going into a renewal, who's being penalized for that. It's not right and we need to make sure as an industry that we're protecting that from happening.
Ryan Farnsworth (11:54):
On the flip side, I think, the same way we pay attention to every single word that the Fed states, when they put out their comments around interest rate hikes and inflation, et cetera, you should pay just as much attention to every word within your policy, because in many cases the word "alleged" or "actual wrongful act", may not be as clearly defined or clearly outlined in your policy as you would want it to. And it takes an expert to truly identify what the best policy language is, and we're learning as we go, but when it comes to the historical knowledge and experience that we have had in terms of settling claims and ensuring coverage under policies, words absolutely do matter.
Ron Borys (12:34):
Sure, and the last takeaway before we wrap up this episode is, for those of you who sat out there and said, what does Side A Insurance really do for me and is there value in Side A insurance? This, unfortunately, is a textbook example of why people do need to buy that "sleep insurance." Because again, once the company becomes insolvent and there's now either a bankruptcy trustee or the FDIC controlling the purse strings of the balance sheet, indemnification, for all intents and purposes, you just get in line in some ways with the other creditors or other parties that were entitled to proceeds. It's a lot easier to get that money from an insurance company through an insurance policy, than to go back to the people who are bringing claims against you for allegedly mismanaging the bank and then saying, I know you think I mismanaged the bank, but can you give me some money to cover my legal bills?
That'll be the first test. The second test is, and we've gotten this request a lot, there is excess FDIC insurance available. It was a product that had not had a lot of attention or taken off in, in recent years, as you all can imagine, it's come back to the limelight. Right now, there's not a ton of capacity available, but we are working feverishly with markets to try to create that solution for folks. To the extent that some of these smaller community banks who were concerned that maybe they're not systemically important and maybe the government will let them fail. They want to have that backstop to be able to provide that assurance to their customers. So that is absolutely something we're working on, and if anybody has any questions or interests in that product, please feel free to reach out to any one of us. But again, this is great. I love the fact that we're able to get this content out in real time. For those of you listening, for the first time and don't know a whole lot about Alliant, please feel free to visit our website www.alliant.com. None of us are hard guys to track down. We'd love to try to help out in any way that we can. So thanks for listening and we'll talk to you again soon.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
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