WASHINGTON — The Federal Deposit Insurance Corp. board took an uncommonly uncontroversial step this week by voting unanimously to consider legal action against former senior executives of Silicon Valley Bank for alleged negligence that led to the bank's failure in 2023.
While the agency often files lawsuits to recoup funds after bank failures, the board's decision to consider legal action against individual employees of a major institution is an uncommon step, according to bank regulatory scholar Art Wilmarth.
"The FDIC has frequently sued officers and directors of small failed banks," he said. "But FDIC has only rarely filed enforcement actions against officers and directors of large banks."
The FDIC's Professional Liability and Financial Crimes Section, alongside the Division of Resolutions and Receiverships, will now evaluate the claims and "pursue those that are both meritorious and expected to be cost-effective," outgoing FDIC Chair Martin Gruenberg said.
If the FDIC proceeds, its goal would be to recover losses from Silicon Valley Bank's collapse, which caused an estimated $23 billion hit to the Deposit Insurance Fund.
The FDIC often sues bankers they see as culpable in an institution's failure, and did so dozens of times following the 2008 financial crisis. In 2010, the agency sued four former executives of IndyMac Bank, which failed in July 2008. While one former executive settled out of court with the FDIC, a federal judge ultimately found the remaining three executives liable for $169 million in damages connected to 23 loans.
IndyMac, however, was not a large bank for today's standards, with only $32 billion in assets when it failed. Regional bank SVB held over $200 billion in assets, most of which were uninsured deposits at the time of its downfall.
Todd Baker, managing principal at Broadmoor Consulting and a senior fellow at Columbia University, said that, while these kinds of lawsuit considerations are generally routine, the FDIC doesn't take these legal actions lightly. The proceedings could shed new light on the individual banker's mishandling of risk, he said.
"The agency looks carefully at the circumstances of each failure to determine if the legal standards for liability are met and if financial recovery is likely, often funded through officer and director insurance," Baker said. "If there was culpable executive misconduct, it will come out in these cases."
As the receiver of a failed bank, the FDIC can hold bank officers and directors personally accountable for civil monetary damages, but the agency cannot file legal charges.
This legal standard governing the FDIC's authority was clarified after litigation during the Savings and Loan crisis of the 1980s and 1990s, when the Supreme Court ruled that the FDIC could pursue claims based on gross negligence or any lower standard permitted by state law applicable to where the bank was based.
For Silicon Valley Bank, California law would likely apply, as the bank was headquartered and conducted most of its business there. Under California's business judgment rule, directors are shielded from liability for good-faith decisions absent fraud or gross negligence, while officers can be held liable for even simple negligence, a significantly lower threshold.
One of the most recent lawsuits by the FDIC against executives of a large failed bank was against Kerry Killinger, the former CEO of Washington Mutual. The FDIC ultimately
Wilmarth said the rarity of FDIC suits against executives of larger banks is partly because large banks frequently are not allowed to fail — typically they are bailed out or are merged into larger banks with FDIC assistance. That was the case with First Republic Bank, which failed shortly after SVB due to contagion caused by the 2023 turmoil.
When they do sue, results of the FDIC's lawsuits against the three executives have not always yielded impressive returns, Wilmarth said. In the Killinger example, the former CEO of WaMu made $88 million in compensation between 2001 and 2007 — the period within which much of the bank's imprudent behavior occurred — while the FDIC settled for $275,000 in cash and $7.5 million in retirement compensation.
If the agency moves ahead with the lawsuit, Wilmarth said it could be an important turning point for executive accountability.
"Given the past record of very weak enforcement actions by federal financial regulators against officers and directors of large banks, it would be a very important step for the FDIC to file lawsuits against senior officers and directors of SVB," he said. "Such a lawsuit would demonstrate the FDIC's willingness to hold senior management of large banks accountable when they engage in serious misconduct."
One new thing here as well is the "show" the agency made in announcing the actions. The FDIC board released a public statement following the action, including remarks from Gruenberg. Alexandra Barrage, a partner at Troutman Pepper and former FDIC executive, said that is not typical for cases like this, an outcome that could partly be attributable to the sheer size of losses — roughly $20 billion — incurred in the bank's rescue.
"I don't recall there being a separate memorandum and resolution on request for authority preceding other suits," she said. "This sends yet another message about the gravity of losses incurred by SVB and the DIF, and the broader push to hold leadership accountable."
Baker says Gruenberg's decision to speak publicly about the potential lawsuit reflects his prioritization of accountability for bank executives, with just roughly a month left before his retirement from the agency.
"The agencies have always been serious about recovering FDIC funds from the officers and directors' insurance of failed banks," he said. "The only unusual thing is Chairman Gruenberg's decision to make a statement on the case — that is political insofar as it reflects the chairman's desire to look tough going out the door."
Another notable aspect of the FDIC's consideration of legal action is that the agency's bipartisan board voted unanimously to consider the suit.
"I am pleased that the FDIC's board expressed bipartisan support for consideration of a lawsuit against officers and directors of SVB," said Wilmarth. "I hope the FDIC's leadership under the incoming Trump administration will continue to take meaningful actions to hold directors and senior executives accountable for misconduct similar to the very serious managerial failures that occurred at Wamu and SVB."
With the FDIC moving in lockstep, even a new administration would be unlikely to pause such proceedings if they ultimately go into effect.
"It is highly unlikely that politics would lead the new leadership of the FDIC to 'go easy' on management of failed banks, as it is ultimately the healthy banks, not the government, that bear the cost of bank failures," Baker said. "Every dollar recovered is one less dollar banks will have to pay through FDIC assessments. The optics of leniency for SVB's directors and senior executives would be terrible in any case given the long history of pursuing this type of case."
Executive accountability has been a uniquely apolitical issue in the beltway in recent years. Senators Elizabeth Warren, D-Mass., and J.D. Vance, R-Ohio, now the incoming Vice President-elect,
"I think regulators from both parties are becoming more sensitive to the accusation that executives aren't held accountable when their institutions fail, and this is a response to that," said Ian Katz, a policy analyst at Capital Alpha Partners. "[Republicans] may have questions about just how harsh a punishment the FDIC wants, but it can only go so far because it can't file criminal charges."
