Introduction
Recently, a significant event closely related to the management of risks has taken place in the American banking realm. It is the unexpected, shocking, and scandalous collapse of the Silicon Valley Bank (SVB) and the subsequent fall of the Signature Bank. The first years in the 20s have been a time of challenge for all industries in the United States, including banking. The COVID-19 crisis has brought an element of chaos and unpredictability to the American economy, and the country’s financial system has experienced significant instability for an extended period.
Only about a year ago, the economy began to recover, and economic cycles and banking operations began to return to their standard, pre-COVID-19 flow of functioning. Due to the resumption of long-term positive trends, it was such a surprise that the SVB collapsed. This paper will explain the risk situation that led to the closure of the SVB, its risk management, and related insurance aspects.
SVB, Operational, and Liquidity Risks
Numerous online articles appeared a couple of days after the quick downfall of the SVB. One of them is by Giang, and there she provided a timeline of events using professional terms and general terms and gave the audience some predictions about American banking (para. 1). It and other sources allow one to identify what types of risks the bank has encountered and failed to address.
It is essential to clarify which market segment SVB operates in and provide its financial resources and services. According to Barrett, this business entity was “the preferred bank for the tech sector” (para. 3). Moreover, it has been a thriving banking industry actor for 40 years (Barrett para. 1). This business entity survived many economic turbulences, including the Great Recession of 2007-2008. However, it could not overcome the comparatively less damaging economic consequences of the global coronavirus crisis, indicating that the cause for the collapse lies in the bank’s structure.
Journalists and finance experts point to two major oversights the SVB has made in the past few years. One of them is not taking into account the impact of the response of the American government by stimuli releases on the country’s economy, Giang believes (para. 4). This sharply and negatively impacted the bank’s capital.
Its primary strategy was to keep a small number of deposits in cash and buy long-term debt, a basic approach for banking institutions like the one discussed (Giang para. 4). The injection of money into the economy triggered inflation trends. To preserve the economic balance, the Fed responded by raising interest rates, which was undesirable and painful for the SVB (Barrett para. 7). Judging by the post factum analytics of financial professionals, SVB has met operational risk.
Those closely examining the critical failure of the SVB provide more interesting insights. Giang notes, “Silicon Valley Bank started to see trouble when start-up funding began to dwindle, leading its clients — a mixture of technology start-ups and their executives — to tap their accounts more” (Giang para. 6). The aggravating factor was that “many of the bank’s customers started drawing on their deposits” (Barrett para. 8).
This led to a shortage of cash in the SVB and the sale of bonds at a discount (Barrett para. 9). Such turbulent behavior and panic actions made their partners suspicious and frightened, ultimately resulting in a bank failure. From the information provided by the investigators and their wording, it can be assumed that the SVB did not foresee the liquidity risk.
SBV’s Risk Management
It is already a historical fact that the SVB has failed to anticipate and handle operational and liquidity risks. It is necessary to describe how these risks are considered in banking. Lee states that “operational risk is the loss arising from inadequate or failed internal processes, people or systems or from external systems” (95). Journalistic investigations show that all these negative opportunities occurred with the SVB.
The inefficient process was to buy long-term investments with a highly probable higher interest rate in the future for three years. Gilbert et al. consider Dan Beck as one of the inadequate people responsible for the collapse of the bank (para. 10). According to them, it was he who presented a false financial forecast with much softer negative assumptions regarding interest rates and the associated possible loss of value (Gilbert et al. para. 10).
Another was Michael Kruse, a senior member of the SVB who approved the financial estimation and strategy by Beck (Gilbert et al. para. 11). Departments of the SVB involved in the implementation of an incorrect financial plan could be considered as inadequate internal systems. The flawed external system was the American economy during and right after the coronavirus crisis and the slowing down of the technology industry.
The unwillingness to consider operational risk by the leaders of the SVB and the inability to manage it after the crisis moment occurred led to the fulfillment of liquidity risk. Lee defines liquidity risk as “the risk of failure to manage liquidity properly” and “to provide liquidity to its customers” (109). The inability of the SVB to provide its customers and partners with cash fits both definitions.
From the perspective of a scholar of banking and finance, SVB deliberately neglected several critical elements of banking risk culture and its own cultural controls. According to Kunz and Heitz, some of these are individual responsibility, oversight, and knowledgeable leaders (465). The newspapers have shown that the senior staff has left all this out of the latest SVB financial strategy.
Using the reasoning of Kunz and Heitz, one might say that the bank has shifted from a customer-driven culture to a sales-oriented one in 2020. They argue that such banks eventually result in “greedy, reckless, and dishonest behavior” (Kunz and Heitz 467). Such cultural orientation has a destructive effect on the organizational structure and operations in times of crisis (Kunz and Heitz 467). Cultural downfall and dysfunctional cultural controls have led to failed risk management.
Aspects of Insurance in the SVB Case
The collapse of the SVB could trigger a domino effect in the banking industry, and to prevent this, the Signature Bank was closed almost immediately, and there is a reason for this. The SVB had many uninsured deposits, and those that exceeded the $250,000 Federal Deposit Insurance Corporation limit (Giang para. 14). The Signature Bank had a similar situation, and because of this, its clients started withdrawing their assets, too. One can only wonder how the American banking system would transform without the federal government’s actions.
Conclusion
Many experts, at least from the field of journalism, call the collapse of the SVB the most significant event in US banking in this decade that just only started. Many see it as the first sign of a new global recession or even a second Great Depression. Observing the situation will provide one with a clearer understanding of where the current banking trends would go.
Works Cited
Barrett, Jonathan. “Silicon Valley Bank: Why Did It Collapse and Is This the Start of A Banking Crisis?” The Guardian, 2023. Web.
Giang, Vivian. “Banking Turmoil: What We Know.” The New York Times, 2023. Web.
Gilbert, Daniel, et al. “Silicon Valley Bank’s Risk Model Flashed Red. So Its Executives Changed It.” The Washington Post, 2023. Web.
Kunz, Jennifer, and Mathias Heitz. “Banks’ Risk Culture and Management Control Systems: A Systematic Literature Review.” Journal of Management Control, vol. 32, no. 4, 2021, pp. 439-493. Web.
Lee, Benjamin. Fundamentals of Bank Risk Management: A Comprehensive Overview for Bankers, Risk Practitioners and Students. Benjamin Lee, 2020.