Final Thoughts on SVB: KISS and Broader Managment Lessons

After a cursory analysis I wrote my initial SVB article a day after SVB collapsed: Quick Thoughts on SVB Collapse | LinkedIn

It didn’t take a rocket scientist or deep analysis to see SVB’s collapse was a huge failure of both SVB management and bank regulators.??Others agree:

Fed’s Barr Calls Silicon Valley Bank a ‘Textbook Case of Mismanagement’ - WSJ

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While I encourage the months of review to get to the bottom of all the facts here, so we can learn from history, I won’t be commenting further since this is the part of the post mortem that begins to annoy me.??So many seek publicity for their desired solutions, which wouldn’t have prevented SVB and aren’t so much solutions to prevent another banking crisis as talking points for the viewpoint they’ve been espousing long before the latest episode.??If you believe in more government regulation you will say we need more.?If you are envious of executive pay you’re going to try to limit that/clawback and use the anger around SVB as support.?If you wish to criminalize corporate incompetence you have another example. ?[Will they extend pay clawbacks to regulators who failed??I’m ok with criminalizing/clawback when poor play causes my sports teams to lose of course . . .] ?I don’t want us to lose sight of the basic failures here so I’ll simply tune out the noise from commentators going forward.?Bottom line:?Let’s keep it simple stupid and focus on key solutions that are directly connected to the underlying problems.?

SVB was a fairly unique and non-traditional bank in that it focused on higher risk businesses in the venture capital arena.??Its assets included long-term bonds worth much less than purchase price and loans that were less liquid and cyclical compared to many other bank portfolios.??SVB focused primary on one segment and didn’t diversify away its risk concentration.?I don’t think we need more regulation to prevent future SVB’s from collapsing.??The Fed has plenty of power to prevent banks from riding toward insolvency.??The recent rollback of certain banking regs did not cause this failure.?Granted some people are better at using hard, and soft, power than others.??All it took here was an estimated mark to market to see SVB was insolvent.??The fact that it took an estimated $20 billion in aid to complete a sale of most of SVB shows this was not a close call!??

Further I submit that more regulation and more complexity may not improve the banking environment.??Simplicity and transparency will be better.?Let’s refocus bank regulators on the basic keystone principles.??First, don’t let a bank become insolvent!??Apparently Fed stress tests had been focused on interest rates falling, not rising, despite the fact that last year was a blatantly obvious rising rate environment.??It is often said regulators fight the last war. We need regulators who can understand basic financial concepts and market realities and not try to sell Treasury bonds as a solution to all ills.?SVB’s internal testing apparently was not based on current scenarios either.??There are 3rd parties that provide this service as an independent voice.??Those who sell bonds will provide current valuations free of charge.??It’s not difficult for a regulator to review SVB models and assumptions and demand these be re-run based on current values, etc.

What is different this time is we now have the first practical example of the dangers of electronic banking, widespread instant communication and social media.??This needs to be addressed.??In the old days we had time to bring in truckloads of $$ to calm a bank run and/or wind down banks in an orderly fashion on a weekend, etc.??Now there has to be an instantaneous response, which probably includes permanent back-up liquidity lines of larger size and a review of capital levels/structure.?

We also have to deal with deposit insurance since the FDIC/executive branch made the decision to bailout all depositors, which in my opinion was a mistake.??I’m fine with a small increase in deposit insurance to $500k – $1 million or so.?[I’ll spare you the long discussion on that].??Or offering additional insurance protection above the limit for a (realistic, market-based) fee.??We should protect the less sophisticated ordinary depositors.??I’m not in favor of bailing out the wealthy, companies who should know better or the politically connected.??I am bitterly opposed to privatizing gains and socializing losses.??I would also support a program that supports key third parties such as payroll providers and those who have to use the banking infrastructure to conduct daily business and which could have large negative impacts on thousands if caught up in a bank failure.??As the risk of quicker bank runs increase we need to look at ancillary impacts.?Again an appropriate fee should be imposed for such protections.?

Let's also think about personnel. SVB erred when it left the Chief Risk Officer position vacant for many months.??What open positions are not receiving priority in your organization???The CRO failure does not excuse other leaders from ignoring basic risk management principles either.???A good CFO, and a good Treasurer, will always be concerned about risk management, duration and interest-rate risk, etc.??The Board also shares risk responsibility and should be leading in this area.

For Boards of Directors:???If you have not been emphasizing risk management it’s time to revisit.??If your Directors are not experienced in understanding and analyzing risk you need to bolster your team to complement this area of weakness.??[Smaller bank boards have traditionally been stocked with prominent community members and large customers. That playbook is no longer sufficient.] If all the Board is hearing are cursory responses from management on risk topics then demand senior leaders bring in their teams for presentations on relevant risk topics and drill down.???Work down the chain until you get honest feedback to the question of what can go wrong and where the risks lie. ??Direct your management to have actionable back-up plans ready to implement.

For Boards and senior leaders:?As the worker shortage is beginning* to ease this is a good time to revisit who is occupying key seats in your organizations.?Again:?focus on the basics and KISS. ?Not everyone is good at their current job.?Some unfortunately get promoted to their level of incompetence.??If you think you have a great understanding of who are the key contributors in your organization may I suggest you read Dr. Kelley’s older research that showed that senior leadership didn’t know everyone who was actually adding value.?Many in the lower and mid-levels of the organization had better information:??Robert Kelley | LinkedIn

[* I said beginning to ease as I acknowledge there continues to be a shortage of talent and it is unlikely to abate anytime soon.??Nevertheless, as the Fed rate hikes bite, the economy slows and layoffs continue, this year will likely be a better time to improve your talent levels compared to recent years.]