For forty years, as the 16th largest bank in the financial sector, Silicon Valley Bank had been considered the epicenter of the startup ecosystem and venture capital. It took just 36 hours for SVB to become the second-largest bank failure in U.S. history.
Funneling most of its money in Treasury and agency bonds, SBV invested the remainder in complex bank assets and traditionally low-risk safe bonds. But as we all know, these safe bonds proved to be riskier than anyone could have predicted. Word leaked by March 7th that the banks’ investments were decreasing, and even before SVB could put on its poker face, people began clearing their accounts.
Days prior, SVB had been considered a startups bank of choice. They opened their doors to all, declined few to none, wined and dined depositors, welcomed the use of their boardroom in lieu of a WeWork membership, took clients to race exotic cars, rolled out Napa Valley’s red carpet for tech titans hosting over 300 wine-related events in one year alone, and provided all-expenses paid ski excursions. Overall, borrowing money from SVB proved to be a breeze for startups. But when a deal seems too sweet to be true, who wants to consider its faults? Least of all, startups and entrepreneurs who are eager for any break they can get.
Although all depositors have access to their money, the looming uncertainty the SVB crisis presents for the tech industry could be imminent for the financial sector if left unchecked. Additionally, it would be easy to not give this financial crisis attention for those a) not in the tech industry and b) not sweating over money sitting in SVB on March 8th. But this crisis has some glaring lessons that demand the attention of those well outside of the tech industry. In fact, the vast landscape of the financial sector should pin their ears back for the easily overlooked parable of the SVB bank fallout.
For starters, the government and regulatory agencies essentially saved the day, or saved whatever was possibly left to save: the FDIC has protected customers’ insured deposits, the Federal Reserve unveiled a new lending program, and President Biden assured the nation of the future health of our country’s financial system.
The bank’s investment type and over-reliance on a single industry (and possible overindulgence on customer perks) exposed it to great risks. SVB’s dependence on a sole industry and type of investment set it up for a hard crash from the start.
Diverse portfolios mitigate risks and absorb shocks from market fluctuations. While it does not ensure gain, spreading investments around is critical to limit exposure to any one type of asset, and over time, reduce the volatility of a portfolio. But by not diversifying investments, the SVB
had set itself up for eventual failure – a lesson not just for other banks, but investors, no matter the size of their investments.
While things weren’t what they seemed for depositors, the bankers themselves couldn’t have predicted a month prior what lay ahead. Just weeks before SVB announced a $1.8 billion loss, SVB’s auditors, KPMG, granted the bank’s parent company (SVB Financial) a clean bill of health in February. And SVB wasn’t the only one to be presented with a faulty clean bill from KPMG. Signature Bank had also crumbled days after its own clean bill of health by the Big Four accounting firm.
Accurate risk assessments and transparency are crucial but, as seen with the SVB, institutions in critical conditions can easily be bypassed as healthy. So what does it say when auditors, financial institutions, and regulators can’t identify fatal risks just a month ahead of a historic financial crisis?
Since Moody’s Investment Service has downgraded SVB Financial. In order to address the risk on the spot (or at least a few weeks in advance), when the reliability of risk assessments and auditors is shaky, banks must ensure and prioritize risk management over ski trips and free lunches. Sometimes all the perks aren’t worth it in the end.
While the SVB concerned themselves with customer perks, saying yes to nearly every loan request received and putting too many eggs in one basket, they overlooked a critical need to conduct regular stress tests. Forgoing practices that allow banks to identify potential risks and vulnerabilities within their operations and assess their ability to withstand potential adverse economic conditions invites a natural disaster. This should have been SVB’s first priority in safeguarding operations and customers’ assets over wine tastings and free lunches.
Our financial system relies on its citizens to not panic and withdraw all of their money at once. Banks operate under the assumption that everyone won’t empty their accounts at the same time. They rely on the depositors’ confidence that the bank will maintain sufficient liquid assets to meet short-term obligations. Without the confidence of depositors, we’ve seen things quickly spin out of control.
In a time of crisis, when you want people to remain calm, to remember to breathe and not jump ship, transparency is also essential to instill confidence in the customers and the institution. Clear, authentic communication within financial institutions, the government, and the public could have possibly staved away the onslaught of withdrawals that brought the bank crashing down. In the case of SVB, misinformation, money, and panic was the lethal recipe that aggravated an already challenging situation, leading to further market turmoil and investor uncertainty.
An implemented crisis communication plans to manage expectations, disseminate accurate information, and reassure stakeholders, investors, customers, and employees could have
empowered SVB to handle the situation with confidence that would have allowed all parties involved to remain unshaken and avoid panic.
But for SVB, the perfect storm hit as everyone lined up outside of its doors (or simply logged onto their smartphones) to empty their accounts.
Yet in the case of such a financial crisis that could have caused a rapid down-spiral for countless businesses, startups, and retailers such as Roku, Vimeo, and Etsy, our government was prepared to intervene. Government and regulatory agencies play a significant role in alleviating the impact of the SVB crisis.
Ironically, the very libertarians who had wanted the government’s hand out of the tech industry so they can innovate freely without regulations quickly welcomed the government to come to the rescue when the SVB ship started sinking. Without the proactive and coordinated efforts from various regulatory bodies and the government in such times, the faulty banking systems would have crashed and burned in a similar fashion to how they did in 2008. Although some would rather have the government out of its hair, it is the proactive and coordinated efforts from various regulatory bodies and governments that have restored the stability in the banking system during turbulent times.
It may seem too simplistic for some, but the old adage holds true; if it’s too good to be true, it probably is.