Lessons we can learn from banks that lost their way… in a big way

by | Oct 10, 2023 | Articles

5 min read

Spring 2023 and Summer 2008

The Spring of 2023 brought us the 2nd, 3rd and 4th largest US bank failures of all time: Silicon Valley Bank on March 10 ($209 billion of assets at its collapse); Signature Bank two days later ($110 billion); and First Republic Bank less than two months later ($212 billion).

The largest US bank failure occurred about 14 ½ years before, when WaMu (formerly Washington Mutual) collapsed in September 2008 – with $307 billion in assets at its demise.i

The Lost Bank by Kirsten Grind

This past summer, a banker friend suggested I read a 2012 book by WSJ investigative reporter Kirsten Grind: The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History. The usual online source helped me procure it speedily and then I dove in. And I found it a compelling and disturbing read, which prompted me to press on rapidly to the end.

And what a disastrous end it was.

And it didn’t have to turn out like it did.

And that disastrous WaMu outcome and the more recent colossal collapses provide numerous valuable lessons for anyone willing to pay attention.

Lost. Really, really lost.

I don’t recall that Grind discloses anywhere along the way why she uses the phrase “the lost bank” to describe the spectacular rise and devastating fall of WaMu. But she doesn’t really need to. The entire book makes the point emphatically. Yet, as I sped through the book, I couldn’t help thinking about the overall “lost-ness” as a rough sequence of serious developments:

  • First, WaMu lost its roots. It started as a staid, community-focused, customer-friendly Seattle bank. Then it undertook a sustained period of exponential growth – truly exponential, and not just using that term as a synonym for “lots and lots.” Specifically, in the last two decades of its existence, it grew from $7 billion in assets serving customers from about 50 branches (mainly in the Seattle area) to the 6th largest bank in the US, with over $300 billion in assets, and over 43,000 employees serving (and mis-serving) millions of customers across the US out of 2,000+ branches.ii That is crazy growth. Dangerous growth. Over 4000% growth over the 20-year period – more than doubling on average every year. In the process, as Grind’s book makes clear, they could not sustain their deep roots in their customer/community-focused culture. And it’s not clear whether they really tried very hard.
  • Next, they lost their way and lost their mind. WaMu deliberately pursued aggressive growth (clearly!…as noted above) and focused on hyper-risky subprime mortgage lending as the growth vehicle. And that lending sector certainly delivered the piles and piles of additional assets for the balance sheet. And plenty of risk to accompany the ballooning assets. And they coupled the ballooning risks with loose oversight of the subprime mortgage division. And management demonstrated a repeated unwillingness to listen to bad news (and it poured in as time progressed). And the board failed to exercise appropriate oversight. Each of those failures is dangerous: rapid growth; loose oversight; intentional blindness to problems; a weak board. In combination, they were devastating.
  • Finally, WaMu lost its existence. Regulators grew nervous, markets got squeamish, and customers began to bolt, giving emphatic “no confidence” votes by moving their deposits (WaMu lost about $19 billion in deposits over about two weeks before the regulators shut it down, and then sold its pitiful remains to JP Morgan).

Meanwhile, in 2nd, 3rd and 4th place…

No two bank collapses are ever identical. And the biggest four certainly were not.

But they did share some significant similarities.

  1. Deposit runs: the run at Silicon Valley bank was particularly spectacular, with roughly $140 billion (85% of its total deposit base) departing or queued up to depart the bank during its last two days of existence. (Compare this to the $19 billion over 16 days for WaMu 14 years earlier – and that on a larger deposit base.)iii
  2. High concentration risk: at Silicon Valley, it was upper-decile levels of concentration in specific depositors and specific industry sectors (high tech, as you’d expect for a bank named Silicon Valley Bank). At WaMu, it was on the asset side, with the enormous piles of subprime mortgages.
  3. Extremely poor risk management. (Criminally negligent is probably a more appropriate way to put it). No elaboration needed.

Lessons from the rubble

No bank or banker wants to live through such debacles. What can we learn from these four dramatic failures?

  • Diversification matters. On every part of the balance sheet. For income streams. Et cetera. This is so fundamental to financial management that it needs no elaboration.
  • Risk management matters. Banks and all economic enterprises inevitably take on risks and make their money by managing them prudently. These four failed banks definitely took on the risks; and they definitely did not manage them well.iv
  • Stewardship matters. The leadership teams and boards at all four banks had been entrusted with valuable things they were responsible for, and which were not their own: hundreds of billions of dollars of assets and deposits;v shareholder equity (representing the investments of lots and lots of moms and pops and retirement plans and…); etc. These leaders were stewards, whether they acknowledged it or not: responsible for these things and accountable to those who had entrusted them to their care. They clearly did not operate with a stewardship mindset. They individually paid a price (lost jobs, lost board seats, damaged reputations, etc.). Millions of innocent bystanders paid a bigger price.

Let’s learn those lessons

I’m fortunate to have worked for a bank that paid attention to diversification and risk management and stewardship even as it grew dramatically (at nowhere near the pace WaMu grew). Every bank and banker should pay attention to those same critical matters. And, though the operations and balance sheets and specific risks look different, non-banks can and should as well. None of us want any part of leading an enterprise that loses its roots, loses its way, loses its mind and ultimately loses its existence.

i Data on all four failures from various sources in the financial press. So widely reported that specific attribution isn’t necessary.

ii The Lost Bank, pp.54, 295

iii John Griffin and Anne Coughlan, FORVIS FORsights whitepaper, Takeaways from Recent Bank Failures, May 2023.

iv Much has been made in the financial press after Silicon Valley’s collapse about the fact that their Chief Risk Officer role was vacant for much of 2022. Thoughts on that: (a) C-suite turnover happens, and a vacancy in that role could indicate upper management and the board were seeking a stronger hand on that tiller (this is benefit-of-the-doubt conjecture on my part; and I doubt it’s actually the case); (b) normal procedure with a C-suite vacancy is to have someone step in as an acting executive in that role to maintain stability while the company seeks the longer-term replacement; the bank may (conjecture again) have had an acting CRO in place during 2022; if they did not, that is inexcusable given the size of the bank and its risk profile; (c) in one sense, a vacancy in the CRO role should not be insurmountable for overall risk monitoring, management and mitigation activities, as every leader in the bank (and especially the C-suite) should be actively paying attention to risk at all times. Clearly, they were not.

v For the top four failures, a combined $838 billion in assets.