Executive Summary Report on the Collapse of SVB. What can be learned and how to avoid the same situation.

Background

Silicon Valley Bank (SVB) was a California-based bank that specialized in lending to technology startups and venture capital funds.

• On March 8, 2023, SVB announced that it had sold $21 billion in securities at a loss of $1.8 billion and would seek to raise $2.25 billion in capital to meet regulatory requirements and calm depositors' concerns.
• On March 9, SVB's shares plummeted by 60% as investors lost confidence in the bank's solvency and some venture capital funds advised their portfolio companies to withdraw money from SVB.
• On March 10, SVB failed to raise enough capital or find a buyer and was closed by California regulators and put under the control of the Federal Deposit Insurance Corporation (FDIC).
• SVB was the second-largest bank failure in US history after Washington Mutual in 2008 and the largest since the 2007-2008 Great Recession (SVB had $209 billion in assets at time of failure).
• The FDIC created the National Bank of Santa Clara to protect insured depositors, who had access to their deposits up to $250,000 no later than March 13, 2023.
• The FDIC also announced that it would guarantee deposits above $250,000 for SVB customers as part of a broader plan to ensure financial stability and prevent contagion effects.

Causes

• The main cause of SVB's failure was its heavy exposure to low-quality bonds that lost value amid rising interest rates and inflation expectations.
• SVB had invested heavily in corporate bonds, mortgage-backed securities, collateralized loan obligations and other risky assets that offered higher yields but also higher default risks.
• As interest rates rose, these bonds became less attractive and more difficult to sell at a profit. SVB had to sell them at a loss to free up liquidity for its depositors who were demanding more cash due to the pandemic-induced economic slowdown.
• SVB also faced increased competition from other banks and fin-tech companies that offered better services and lower fees for tech startups and venture capital funds.
• SVB's management failed to anticipate the changing market conditions and diversify its portfolio, as well as manage its Balance Sheet (Assets-Liabilities Management (ALM)). It also failed to communicate effectively with its stakeholders and regulators about its financial situation.

Lessons

• The failure of SVB highlights the importance of prudent risk management and asset-liability matching for banks. Banks should avoid excessive concentration in any single asset class or sector and maintain adequate capital buffers against potential losses.
• The failure of SVB also underscores the need for effective supervision and regulation of banks. Regulators should monitor banks' liquidity positions closely and intervene promptly when signs of distress emerge. Regulators should also enforce strict standards for disclosure, governance, and accountability for banks.
• The failure of SVB demonstrates the interdependence of financial institutions and markets. Banks' failures can have systemic consequences for other banks, investors, businesses, and consumers. Therefore, regulators should coordinate their actions across jurisdictions and sectors to prevent contagion effects and ensure financial stability.

Conclusions and Recommendations

• To avoid a similar situation as SVB's failure, our bank should ensure we take the following actions:

1. Review our asset portfolio regularly and adjust it according to market conditions.
2. Have ongoing engagement and communications with our funding partners to provide them with a level of comfort that the bank’s ALM, capital, leverage and liquidity are all being effectively managed and are at prudent levels.
3. Ensure excellent communications and transparency with founders, stakeholders and regulators.
4. Maintain sufficient cash liquidity reserves and access to funding sources.
5. We should also secure alternative funding sources (which have been already negotiated), and are available if required, such as inter-bank loans, repurchase agreements, or lines of credit from other institutions (funders, etc.).
6. As much as possible, we should diversify our investments across different asset classes, sectors, geographies and maturities.
7. We should also comply with all regulatory requirements regarding capital adequacy, liquidity, leverage, stress testing, and reporting. In addition, we should have internal thresholds as well as early warning signal indicators.
8. We should disclose our financial performance, risk profile, and strategy clearly and timely to our shareholders, customers, employees, and regulators by way of regular financial reporting and Pillar 3 type disclosure reports.
9. We should also engage proactively with regulators and cooperate with them to address any issues or concerns.
10. If we enter into bond investments, we should minimise our exposure to low-quality bonds that are sensitive to interest rate changes.
11. If in the future we take deposits, we should keep enough cash and liquid assets on hand to meet our depositors' needs and obligations.
12. If required, consider raising more equity or retain more earnings (i.e., reduce dividends) to increase our capital ratios and cushion against potential losses.
13. Where applicable, leverage social media and other channels (i.e., traditional media) to communicate with our external stakeholders and enhance our reputation.
14. Where applicable, we should use social media platforms to share our vision, values, achievements and insights with our customers, investors, media and public.
15. We should also monitor (and document) customer feedback (direct from customers, online, etc.) and respond appropriately to any queries or complaints.

Mark Dougherty, CPA/CMA