Bank crises put risk practices in spotlight

As Silicon Valley Bank and Signature Bank have collapsed under bank runs, and Credit Suisse edges nearer a default after admitting “material weakness” in its financial reporting, risk management practices of banks and asset holders have come in the eye of the public over the last days. “Businesses with weak #riskmanagement functions look pretty vulnerable right now,” states one specialist on LinkedIn.

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“Silicon Valley Bank had no official chief risk officer for 8 months while the VC market was spiraling,” notes news outlet Fortune in a headline.

On LinkedIn, compliance professional James Tunkey makes a comment to that Fortune article (here lightly edited): “Recall: No effective risk controls at Credit Suisse … no due diligence by VC investors in FTX … No Chief Risk Officer at SVB with collapse causing more pain for alternative investors …”

“Businesses with weak #riskmanagement functions look pretty vulnerable right now,” he concludes.

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A mixed bowl of risks

Sorting out the different forms of risk involved through these last days’ market worries around  banks can be a challenge. With three US banks down (Silvergate, Silicon Valley, and Signature), the market’s eyes are turning to Switzerland’s Credit Suisse, whose share price per 15 March is about 3 percent of what it was in its early-2007 heyday. (This summary by Finbold points out some relation between the misery of Credit Suisse and the US financial system.)

While the current general worry in the market seems to add weight to burden, this does not necessarily mean that the problems have the same causes. Together, though, the cases are raising discussion about sound operational practices in terms of risk management.

Deposit clients were a herd

With California-based Silicon Valley Bank, whose rise and fall is vividly detailed in this story by The Verge, one suggestion is that it went lost on its asset side by holding fixed-interest bonds, while carrying floating-rate liabilities to its depositors. (BNP Paribas’ Adrian Docherty, a LinkedIn user, describes this here, pointing to exposure indicators at scary levels having been published already a year ago.) Yet, beside the asset-side issues, there was also a problem on the liabilities side, in that the bank’s deposit-holding clients were concentrated in the region’s tech community and came to run as a herd for their money upon news of deteriorating solidity at the bank – as MarketWatch points out.

US authorities are not bailing out the bank, but the Federal Deposit Insurance Corporation has taken over its operation and lets depositors withdraw money in orderly fashion again.

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