The Wall Street Journal has an excellent article recounting how SVB customers, their venture capital backers, and other business partners all engaged in a collective freakout last week, tapping furiously on their phones to fire up fintech apps and execute wire transfers as quickly as possible. Then everyone panicked, and that panic was magnified thanks to social media. What happened was that nobody paid attention to those red flags (see vendor risks, above nobody challenging their own assumptions) until last week. On the contrary, critics say, the bank’s woes had been piling up for months and were staring out at us from the 10-Q all along. How did SVB collapse so quickly?įirst, there is plenty of evidence to suggest SVB did not unravel quickly. Then consider mitigation steps that might be warranted to reduce whatever weaknesses you find. So the more you can develop vendor risk management capabilities, such as scenario-planning and deep analysis further down the supply chain, the better. (Rippling moved to JPMorgan for banking services over the weekend, and fronted its own capital to cover costs until the transition finishes.) When SVB failed, Rippling couldn’t process payroll for its customers - including companies that weren’t SVB customers at all. SVB even provides an example of fourth-party vendor risk: Rippling, a payroll processor that used SVB for banking services. True, we don’t normally question whether a mid-sized bank such as SVB will collapse overnight but you might perform an audit of your cash management function, to identify risk mitigation practices such as using brokered deposits or keeping three months of operating cash at a separate bank. They are questions you want to anticipate before the crisis, by understanding your vendor relationships and the risks that might happen should your most important relationships go haywire.įor example, even a cursory vendor risk analysis would identify your bank as a top tier relationship that needs attention. Those are not questions you want to ask yourself in the middle of a crisis. How can we preserve our liquidity and stability over the longer term?.Imagine the questions they asked themselves: Put yourselves in the shoes of those SVB customers, waking up last Friday to find that their bank - perhaps the most important vendor relationship a small, growing company can have - was unavailable. One immediate lesson: the importance of vendor risk management. Unless your company is a depositor at SVB or a bank with a balance sheet as precarious as SVB’s, you can observe things from a distance for lessons to learn, rather than crises to respond to. The good news for most compliance and risk professionals is that the SVB crisis will not disrupt your company directly. Now come the questions, fast and furious. They began pulling out their savings, which made SVB even weaker, until the bank failed on Friday. Customers saw that state of affairs and got scared. That means the bank was under-capitalized. So the income from SVB’s assets (the loans) couldn’t keep pace with the costs of servicing SVB’s liabilities (the savings accounts). Then, within the last year, it had to start offering higher interest rates on savings accounts, to remain competitive in a world where the Federal Reserve had been raising rates. Silicon Valley Bank spent years issuing loans at low interest rates. Let’s begin with a one-paragraph review of what we do know. GRC professionals would do well to acquaint themselves with what happened here and what’s likely to happen next. That sort of thing drives corporate leaders bananas, and compels regulators to take action. A risk most people hadn’t foreseen has struck, swiftly and widely. That’s the real issue here for compliance, audit, and risk professionals. Instead, we have legions of corporate executives and board directors startled at a risk they hadn’t anticipated, wondering, “Could this happen to us? What precautions should we take to assure that it doesn’t?” That’s helpful to the depositors, but we still don’t know exactly how SVB’s plight started, or how many other banks might face similar predicaments come Monday morning. Unfortunately this sorry debacle also raises many issues for the larger community of risk managers, regulatory compliance officers, and auditors, so let’s take a look.Īs I write these words on Sunday, banking regulators have rolled out an emergency loan program to keep SVB depositors whole. Life comes at you fast, a point that many tech companies and banks are contemplating today thanks to the collapse of Silicon Valley Bank.
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