Did lack of proper risk management strategy ruin SVB?
Modern world is beset with lot of uncertainties. One wrong move by the management and the Board would lead to adverse cascading effect on the company and sometimes on the entire economy.
In the case of collapse of Silicon Valley Bank, 16th largest bank of USA, it did not have senior most risk officer for about eight months in 2022. Only in January 2023 they brought in chief risk officer on board, it is told. Though SVB claimed in its regulatory filings that it had conducted regular interest rate risk hedging activity, it was quite a small portion compared with its AFS investments. It reported $550 million in notional value of interest rate derivatives as interest rate hedges.
Another reason for its collapse is its portfolio was concentrated in Bonds, which has crashed recently following raise in interest rates to as close to 5%. It was forced to sell bonds at huge loss of $ 1.8 billion and to fill up its loss it wanted to raise fresh capital worth $ 2.25 billion. It resulted in the fall of share value of SVB by 60%, trading in the stock was halted for volatility multiple times during the session, depositors lost confidence in the bank, ultimately resulting in the bank run.
Bank’s poor investment strategy, risk management practice, concentration of portfolio in volatile sector ultimately dug its grave.
The problem seems to be systemic, it is told, snowballing the entire banking sector and beyond. Signature Bank collapsed in close succession. Nearly 10 banks are in line of collapse, it is rumored.