How Strong Is Your Bank?

It is no longer news that Silicon Valley Bank, the 16th largest bank in the United States with total estimated assets of about $209 billion was shut down in March 2023 by the California Department of Financial Protection and Innovation.

The bank’s collapse represents the second largest bank failure in U. S history coming behind Washington Mutual which went under in 2008 with total asset of about $307 billion at the time.

What happened to Silicon Valley Bank?

How did a bank which experienced major growth during and after the Covid pandemic between 2019 and 2022 during which period it nearly tripled in size, suddenly collapse with seemingly no prior strong signals or warnings of the impending imminent disaster?

A major contributory element among a number of other factors leading to the collapse of SVB was that its investments greatly decreased in value.
Then there was a bank run with depositors making series of substantial withdrawals after the bank made its losses public.
Amid SVB’s collapse, other banks in the U. S including First Republic Bank, Western Alliance Bancorp and a number of regional lenders saw their stocks take a swift plunge downwards.
The global financial market has experienced some expected ripple effects as global financial stocks lost an estimated $465 billion in market value as at mid-March 2023 and investors cut exposures to lenders from New York to Tokyo in the wake of SVB’s collapse.
So the question remains, what happened to Silicon Valley Bank and how could the bank’s collapse have been averted?
A crucial part of the answer to that question would hinge on the attitude and approach of SVB’s C-level managers to the all important issue of Credit risk.
Really, how important is the management of a bank’s credit risks?
The Federal Reserve is reported to have raised concerns about questionable risk management practices at Silicon Valley Bank four years before its eventual meltdown. The bank had been put on notice by the Fed on concerns about its risk management systems, especially its portfolio of securities and its focus on venture-capital and tech startups.
Infact the bank was issued a warning in January 2019 to that effect as evidenced by some documents.
Did the management of Silicon Valley Bank take such warnings seriously?
Or did they continue with business as usual with the misleading belief and assumption that they could always wing it?
After all, the bank had experienced astronomical growth in recent years.
Also the bank had a total asset value of over $209 billion. Business was good.
It is pertinent to note that the effective management of a bank’s credit risks is fundamental and crucial to its continued survival as a thriving business entity.
As such, every effort should be made to ensure that credit risk systems and processes are water tight at every point.
Truly, no effort is too great in this regard.
A stitch in time, can save the entire ship.

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