Top Audit Firm Gave SVB, Signature Bank Clean Bill of Health Just Days before Collapse

March 15, 2023 Stan

One of America’s leading audit firms, KPMG, is defending giving both Silicon Valley Bank (SVB) and Signature Bank a clean bill of health just days before they collapsed last weekend.

The banks imploded when customers rushed to withdraw their savings in panic-fueled bank runs.

The two banks collapsed shortly after their respective annual reports were certified by KPMG.

KPMG is one of the so-called “Big Four” accounting firms.

The list also includes Deloitte, Ernst & Young, and PricewaterhouseCoopers.

CEO of KPMG’s U.S. operations, Paul Knopp, said that he stands by the firm’s audit work on SVB and Signature.

Knopp defended the audits during an interview with Financial Times during a Tuesday event at the NYU Stern Center for Sustainable Business.

He pointed to “market-driven events” and “unpredictable” customer reactions to such events as examples of factors behind bank failures.

He argues that audit work is powerless to address those conditions.

“As we take into account everything we know today … we stand behind the reports we issued and we think we followed all professional standards,” Knopp told the outlet.

Knopp insists that KPMG “absolutely” considered all the facts that were known up until the day the audits were issued.

He added that it’s impossible to know with certainty what will happen after the reports are released.

He didn’t go into the specifics of the causes of the twin bank failures, however, only discussing general terms about “actions” and “reactions” in the context of bank runs.

The SVB collapse came on Friday as depositors rushed to withdraw funds as word spread that the bank had booked huge losses on its bond portfolios.

The bonds eroded in value due to rising interest rates.

Signature’s failure came as panic spread from the collapse of SVB and as Signature’s connections with the crypto space seemed to spook depositors, who rushed to withdraw their money.

Both banks had above-average amounts of uninsured deposits.

The level of deposits means the bank mostly held amounts above the Federal Deposit Insurance Corporation’s (FDIC) deposit guarantee of $250,000 per depositor per account category.

Uninsured amounts are subject to losses in case of bank failure.

On February 24, KPMG signed its audit of SVB.

The audit was signed off two weeks before the bank failed.

The Signature audit was signed off on by KMPG on March 1, a little over a week before its collapse.

Questions have been raised as to why neither of KPMG’s two audits included a so-called “going concern” warning.

Such a warning would be a requirement if the audit firm had substantial doubt as to whether the banks could survive over the next 12 months.

Experts expect that KPMG will likely face regulatory scrutiny over the audits.

“Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warning, is trouble for the auditor,” Lynn Turner, former chief accountant of the Securities and Exchange Commission (SEC), said in remarks to the Wall Street Journal.

The failures of SVB and Signature were the second and third biggest bank collapses in U.S. history.

The failures have sparked fears of contagion risk.

This prompted U.S. financial authorities to adopt a “systemic risk exemption” and expand the FDIC’s guarantee to cover all the deposits at the two banks.

The move ensures that money that would normally be uninsured, and therefore subject to market discipline and losses, would be included.

There has been some opposition to the blanket coverage, however.

Some say it fuels moral hazard and amounts to a bailout whose costs will be borne by customers of other banks that pay annual deposit insurance premiums to the FDIC.

At the same time, there have also been calls for the FDIC to waive its $250,000 coverage cap for all banks in the United States and temporarily guarantee all deposits as a way to build confidence in the financial sector and prevent bank runs.

The lighting-fast collapse of SVB and Signature Bank has fueled questions among everyday savers and retail investors about possible impacts on their finances.

Concerns are even growing among those who didn’t have any deposits at either of the failed banks.

Following the twin collapses, the Federal Reserve rolled out an emergency funding facility for banks and other deposit-taking financial institutions.

The Treasury Department backstopped the mechanism with $25 billion and the FDIC expanded its guarantee to all deposits at the two banks.

On Monday, President Joe Biden said that the emergency measures mean the U.S. banking system is “safe” and Americans can “have confidence” that their deposits are secure.

While bank stocks have taken a beating due to the twin failures, some experts say that the spillover implications for other banks are likely to be limited.

“This is a classic asset-liability mismatch, triggered by higher rates, and compounded by leverage,” Jurrien Timmer, director of global macro at Fidelity, said in a statement.

As the Federal Reserve has raised rates to quell soaring inflation, bond values have decreased and banks like SVB have taken losses on their bond assets.

“The good news is that this seems to be an isolated incident or at least a problem that may be limited to some smaller banks,” Timmer added.

Meanwhile, some economists have compared the current situation to the system-wide financial meltdown that took place in 2008.

Others, however, have pushed back on this idea, arguing that what happened now is more narrow in scope and unlikely to escalate into a systemic crash.

“In my view, this does not appear to be a situation that could become systemic, like the subprime mortgage collapse did in 2007,” Timmer said.

SVB’s failure was sparked when it took $1.8 billion in losses after liquidating much of its Treasury portfolio.

The Treasury portfolio dropped in value due to the Fed’s interest-rate hikes.

FDIC chair Martin Gruenberg warned recently that U.S. banks are sitting on unrealized losses on their bond holdings of around $620 billion.

But Gruenberg added that banks in the country are “generally in a strong financial condition and have not been forced to realize losses by selling depreciated securities.”

A few regional banks have seen their shares plunge in the wake of the SVB and Signature failures and credit ratings agency Moody’s Investor Service has put six banks on review for a downgrade.

On Monday, Moody’s also cut its view on the entire U.S. banking sector, from stable to negative, citing “rapid deterioration in the operating environment.”

On Tuesday, top Wall Street expert Robert Kiyosaki, who predicted the collapse of Lehman Brothers in 2008, warned that Swiss banking giant Credit Suisse will be the next bank to topple.

On Wednesday, Credit Suisse’s share price plunged to a record low, causing trading to be halted.