SVB - Getting risk management wrong...as a bank?!

You expect a restaurant to be able to serve (edible) food, a hospital to be staffed with trained doctors and a bank to have a Chief Risk Officer to oversee risk? Simples.

In the case of Silicon Valley Bank, they didn't have a CRO for 8 months from April 2022 until January 2023. A few weeks ago, the bank collapsed, was seized by the Federal Deposit Insurance Corporation (the folks who insure bank deposits in the US) and threw the tech community into chaos. Not to to mention the risk of contagion (not the movie about the virus but risk of disruption to the financial system)!

I'm not going to go into detail on how the bank collapsed. Plenty has been written. At its core, it was a perfect storm of a (1) botched fundraise to shore up its balance sheet, (2) a combination of not managing their interest rate risk in a rising rate environment and then selling bonds at a $1.8bn dollar loss to shore up funding, (3) the panic in the tech industry which ultimately lead to a loss of confidence (which usually precedes a loss of cash as far as banks are concerned) that led to people withdrawing their money – or as the industry calls it – a run on the bank. In fact, a slowdown in tech funding already led to falling deposits as there was probably a structural outflow of cash from the deposit base although I'm (really), no expert!

The point of this post isn't to poke further holes into the conduct of management in their oversight of a bank. We now all know it sucked. What leaves me puzzled is the trail of crumbs that pointed to this train wreck and the handling of it.

Just a few facts, thoughts and questions:

• The stress tests didn't model for a rise in interest rates. Why? The Fed's stress test had core inflation at 2% until 2025 🤦🏼‍♂️
• Banks with $250bn in assets and above are stress tested annually (the JPs, Citi Bank or BofA's of the world). Banks with $100-250bn of assets are put on a 2-year cycle. SVB only passed the >$100bn in assets in 2021 and wasn't included in 2022 stress test. From Q1'20 to Q1'22, SVB grew its deposits at 220% vs. 26% for all FDIC insured institutions. Why doesn't this attract regulatory scrutiny? I'm not calling more regulatory oversight, I'm making the point about timely oversight
• In 2021 – the Fed found weaknesses in their risk management, leading to a MRA (matters requiring attention) or immediate attention regarding having enough liquidity should things go wrong. The bank continued to grow its deposit base. In mid-2022 – SVB underwent a more careful look and was rated poorly on governance and control. The music kept playing. Early 2023 – the company was in a "horizontal review" which highlighted further deficiencies (source: NY Times). By now, it was already too late. Why didn't the supervisors (both the Fed and FDIC) do enough to ensure they corrected those issued? Enter inefficiency and bureaucracy!
• Governments and regulators must do better when it comes to setting more transparent guidelines (*yawn* rules) for stakeholder management and communication. How on earth could SVB's CEO call up customers and 'assure' them their money was safe is beyond me. Saying "our deposits" are insured mean nothing when the amounts insured don't move the needle for businesses!

SVB claimed that nearly 50% of VC backed tech and life science companies banked with them. This is concentration risk at it's finest. How start ups and scale ups bank will fundamentally change I think. Treasury management springs to mind.

What is ironic is that it seems this is the first bank run caused by social media. SVB, a victim of incompetence and its tech savvy customer base.

Peace ✌🏼