Svb’s Collapse And The Changing Cfo’s Ability To Adapt To Adverse Conditions

SVB Bank’s failure has sent shockwaves throughout the financial and IT industries, with many wondering how it could have happened in light of the tightened laws and controls enacted in the wake of the 2008 financial crisis. Though many factors contributed, the bank’s treasury management methods stood out as especially worrying.

It would appear that SVB Bank’s treasury management practices were inadequate. An issue that should have never arisen is that the bank did not effectively hedge interest rate risk in the banking book. Banks have been handling this risk long before authorities took notice. Since their deposit base was already concentrated (mostly consisting of fintech start-ups and early-stage enterprises), the “herd” moved rapidly, causing a serious liquidity constraint when consumers began withdrawing deposits en masse due to the consequent losses.

Maybe more alarming is the claim that upper-level SVB management knew about the problems yet did nothing to fix them. Other accounts state that the bank’s officials were forewarned about the dangers of the bank’s investments and liquidity management policies but chose to disregard them. Even after more than a decade of historically low interest rates, bank treasury departments and the governing ALCO (asset-liability committee) should be cognizant of the impact of interest rate risk on the balance sheet. Banks that take deposits cannot afford to be complacent about controlling balance sheet risks.

These failures have had disastrous results. It appears that SVB Bank in the United States and the United Kingdom will be “bailed out” because HSBC has agreed to purchase the UK bank. Around the world, similar deals will inevitably be made. Concerns regarding the adequacy of regulatory monitoring and the possibility of similar failures in other institutions have been raised as a result of the collapse, which has broader ramifications for the financial system as a whole. As a direct result of SVB, other banks will be subjected to intense inspection (both qualified and unqualified), and it is hoped that necessary interventions will reduce the likelihood of a systemic crisis.

The banking industry’s treasury management methods are under renewed scrutiny as a result of these worries. There may be a need for more stringent rules regarding the investments that banks can undertake, as well as more stringent controls over liquidity and risk management.

Eventually, the bankruptcy of SVB Bank serves as a clear reminder of the need for effective treasury management in the banking sector. Banks and other financial institutions need to be watchful with their handling of cash and other assets, and they should put the sustainability of their businesses first. If this doesn’t happen, it may be disastrous for the entire financial system, not just for certain institutions.

Prepare for the Future and Act on It

Although the near future of financial institutions and the economy is unknown and fears about spillover lurk, there are steps that may be taken to lessen the blow and keep abreast of the situation. 

After these bank failures, new legislation or restrictions may be introduced, although none have been introduced as of yet. When possible, it’s in your organization’s best interest to anticipate and respond quickly to any impending changes in policy or legislation that might have an effect on your operations.

Risk Management

It’s crucial that your company be in a position to evaluate the SVB collapse’s effects beyond the current legislative and regulatory framework. Such events can have far-reaching consequences for businesses and governments around the globe. The best strategic, operational, and investment decisions may be made by an organization that is aware of the potential impacts of this issue across a variety of industry sectors in both developed and emerging markets.

The Changing CFO’s Ability to Adapt to Adverse Conditions

Long before SVB went out of business, startups and FinTechs (in particular) were facing their own unique existential crisis. Younger CFOs are attempting to update company processes and cut operating costs in order to adapt to the “new normal” of economic volatility and ongoing digital adoption.

They have a long list of things to do, and they need to add or re-emphasize banking relationship oversight and vigilance. To mitigate even overnight counterparty risk, several corporate treasurers are now considering having their bank balances swept every night. It’s critical that you can keep your firm running even if a key financial or supply partner goes under. The most important takeaway is that no bank, no matter how large, is safe from collapse. As much of your wealth as possible should be spread out among several investments. Making sure organizations have redundancy for everything for the sake of company continuity is vital for future safety.

With the demise of Silicon Valley Bank, CFOs of companies that had funds there must now re-evaluate their treasury and cash management plans, as many businesses feared they too would fail without access to their capital. It’s time to seek the advice and services of Credo CFOs & CPAs.