Silicon Valley Bank (SVB) made the headlines for all the wrong reasons in March 2023 when it unexpectedly collapsed, marking the third-largest bank failure in US history. What made SVB’s collapse unique was the speed at which it happened. Within just 48 hours, SVB went from being a major player in the banking industry to being placed in receivership by the Federal Deposit Insurance Corporation (FDIC).
The trigger for the catastrophic events was a client panic, largely fueled by social media, following SVB’s announcement of a staggering $1.8 billion loss on 8 March 2023. The panic led to a massive bank run, with clients withdrawing around $42 billion. This reaction was intensified by the fact that many of SVB’s clients were high-profile venture capital firms and tech startups, who found little comfort in the FDIC’s protection fund guarantee of deposits up to $250,000.
This calamitous event was followed by another banking crisis just two days later, when state officials closed Signature Bank, a New York-based bank that had been courting cryptocurrency deposits and uninsured deposits on a large scale. To restore confidence in the US financial system, the FDIC, the Treasury Department, and the Federal Reserve acted swiftly, announcing that all deposits in Silicon Valley Bank and Signature Bank would be protected, even those exceeding the $250,000 limit.
Have we learned from the collapse of SVB?
As we approach the third anniversary of the SVB collapse, it is worth reflecting on whether the banking industry has learned from this experience. Are we still at risk of similar failures, or have appropriate measures been taken to prevent a recurrence?
Stas Melnikov, Head of Quantitative Research and Risk Data Solutions at SAS, a leader in analytics software and services, shared his insights on the matter in an interview with Retail Banker International’s editor, Douglas Blakey. Melnikov pointed out several structural issues that existed before SVB’s collapse and still persist today. For example, a decade of super low interest rates has pushed many banks into a significant asset liability mismatch from an interest rate risk perspective.
Fragmented systems pose a risk
Melnikov also highlighted the danger of fragmented systems in the banking industry, stating that financial risks don’t exist in isolation. In the case of SVB, it was not just interest rate risk but a combination of interest rate risk, credit risk, and liquidity risk. Hence, banks need to adopt an integrated approach to balance sheet management, breaking down the silos between credit risk, liquidity, interest, and capital to optimize funding.
However, having integrated systems is not enough. These systems need to be traceable and auditable, allowing banks to justify their actions and understand the assumptions that underpin their calculations. Despite the lessons of SVB, many banks still lack this level of sophistication in their risk management processes.
Investment in the right technology is crucial
Fortunately, modern technology offers solutions to these challenges. Software such as SAS risk management and analytics solutions can help foster a risk-aware culture, optimize capital and liquidity, and meet regulatory requirements while enhancing efficiency and transparency. For banks, the challenge is to invest in the right technology and allocate sufficient budget to optimize their risk and data analytics strategies.
According to Melnikov, the large Globally Systemically Important Banks (G-SIBs) understand the importance of integrated balance sheet management and are making progress in this area. However, smaller regional and community banks are struggling to keep up, partly due to the burden of regulation. Despite their vulnerability and their crucial role in serving their communities, these smaller banks often lack the resources to implement advanced risk management practices.
SAS: Democratizing advanced analytics
SAS is playing a key role in addressing this challenge by democratizing advanced analytics. Their integrated product stack offers everything from data acquisition and quality control to model development and implementation, enabling small and large institutions alike to manage risk more effectively. As Melnikov puts it, SAS is leveling the playing field, ensuring that all institutions can thrive, not just the very large ones.
The lessons of the SVB collapse serve as a stark reminder of the importance of sound risk management in the banking industry. By learning from these lessons and investing in the right technology, banks can navigate the landscape of financial risk more effectively and prevent similar failures in the future.
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