The Silicon Valley Bank collapse may be an isolated event… but it’s a cautionary tale.
The news of a bank collapse always sends shockwaves through the financial world, stirring up contagion concerns and triggering memories of the Global Financial Crisis (GFC) that reshaped the banking industry in 2008. While the collapse of Silicon Valley Bank (SVB) may seem like an isolated event caused by unique circumstances, it serves as a wake-up call for the entire banking sector.
Initial reports indicate that SVB's collapse, and the subsequent Signature Bank’s fall, were not due to a systemic credit crisis like the one that triggered the GFC, but rather a combination of liquidity and interest rate mismanagement largely specific to those banks. The concentration of uninsured depositors and the absence of international liquidity compliance standards added to the banks’ vulnerability. It appears they focused on maximizing Net Interest Income (NII) without fully considering both the real stickiness of the sophisticated depositor base and the Economic Value of Equity (EVE) risk of their investments. They managed an Asset and Liability Management (ALM) and Liquidity mismatch just at the point Interest rates spiked and the result was huge unrealized Available for Sale (AFS) and Held to Maturity (HTM) losses. The liquidity event forced SVB to capitalize on these.
We should not take comfort in this but rather be alerted to the impact of inadequate risk management practices. Accurate analytics, robust scenario analysis and the ability to ask timely what-ifs from your risk systems are key to navigating this unknown future. This is what depositors and investors expect as a fiduciary responsibility from banks.
There are important lessons to be learned from the collapse of SVB, and the banking sector must pause and consider them carefully. Even for the banks that must comply with liquidity regulation, responsible risk management is much more than simply complying with the letter of the regulation, which is often borne out of previous crises.
Regulation, by intent, has become more siloed, with the objective of providing a transparent and conservative approach, risk type by risk type. Strong risk management, however, should look at the balance sheet more holistically and assess the interconnectivity that regulations miss, whether it’s the interconnectivity of market risk, credit risk and liquidity risk, or in the case of SVB, specifically the interconnectivity of liquidity risk, interest rate risk and concentration risk.
The collapse of SVB provides a cautionary tale to the banking sector that shines a light on the importance of strong risk management today more than ever. Banks should consider the real nature of the interconnected risks on their balance sheet and manage them—even at the expense of short-term income. Minimum compliance with regulation and a focus on accounting ahead of risk can leave banks exposed to whatever the next crisis may bring.
“At SS&C, we invest in solutions and services that go well beyond regulatory compliance. Our solutions enable financial institutions to proactively manage financial risk using powerful analytics. This allows banks to navigate through turbulent markets, thereby helping institutions to avoid the crises faced by SVB and Signature Bank.”
-- William C. Stone
Chief Executive Officer, SS&C Technologies
Contact us to find out how we can help.
Written by Dr. Andrew Aziz
Chief Strategy Officer, SS&C Algorithmics