The U.S. Senate held hearings Tuesday, quizzing the Federal Reserve about what went wrong with Silicon Valley Bank (SVB) and what could have been done to prevent its failure. The run on SVB and its subsequent collapse spread to other regional banks, some with the same problems and at least one other, First Republic Bank, just because of its association with San Francisco.
Falk Rieker, global head of SAP’s Industry Banking Unit, said that overall the banks that faltered — SVB, Signature Bank, Silvergate Bank and First Republic — had five things in common: a lack of a comprehensive risk management framework; weak internal controls and financial reporting; a specialized business model that focused on one industry instead of being diversified; the loss of customer and investors; and a rising interest rate environment that led to vulnerability to short sellers. In fact, from April 2022 to January 2023 during a rising interest rate environment, SVB had no chief risk officer.
“This created a perfect storm,” Rieker said. “I think what you learn from that is that all these institutions have to put a priority on all other institutions, a priority on technology and a priority on staying compliant in order to reduce the risk and to manage financial performance. Last but not least, it shines a spotlight on the human beings in these organizations: if you don’t have people who have the skills in place, even the best technology will not help you.”
Among the reasons why SVB — the bank of startups and venture capitalists (VCs) — failed is that its customers were tightly connected to the technology startup and venture capital industries. Its assets also were concentrated in U.S. Treasury bills, which lost value as interest rates spiked.
Silvergate Bank, which concentrated in cryptocurrency, failed next, a ruination exacerbated by the challenges facing the crypto industry and the failure of FTX trading platform. The contagion spread to New York-based Signature Bank because of its size and the fact that it had some exposure to cryptocurrency.
Finally, First Republic Bank failed by association to San Francisco, the source of 40% of its deposits. That means exposure to VCs and startups. Although 60% of its loans were mortgages on single-family homes, more than 10% of its borrowers are VCs and startups.
While technology cannot ensure that people pay attention or choose the right path, it can make an impact. First, it can make a big impact on financial reporting and analytics, which can gauge a bank’s health on a daily basis. “The table stakes of running a bank include understanding where you are with your business,” Rieker said.
Second is data management, because if the quality of the data is poor it can result in misleading results.
Third is enterprise risk management, helping manage interest rate risk, liquidity risk, credit risk and operation risk. Technology can produce scenarios that reflect how a bank fairs under any risk condition. “This is absolutely key,” Rieker said. “Otherwise, you’re driving without lights in the middle of the night.”
Last is human capital management solutions to help attract the best talent in an environment where new industries, such as technology or life sciences, now compete for the same talent.