Silicon Valley Bank collapse: lessons for directors

Financial Resilience is one of the top five issues we highlighted for directors for 2023. Nothing signals a lack of financial resilience like a bank collapse, and Silicon Valley Bank (SVB) is no exception, along with some of its US regional counterparts. As a bit of background, the SVB collapse in March 2023 was the second largest in US history. Uncertainty about the bank's financial situation sparked another world first, a digital bank run, at least initially, as fears rose about wider impacts on US banks and potentially others internationally. With two other banks in the US collapsing and other developments with Credit Suisse in Switzerland, those fears appeared to be on the verge of being realised. The situation got to the point where even one of the largest investment firms in the world, BlackRock published information about their relatively small exposure to SVB.  More recently, we’ve also seen the collapse of First Republic Bank which has bumped the SVB collapse down one place to the third largest bank collapse in US history!

A recent webinar provided a slightly different take on the SVB collapse than those heard to date. It covered the human story behind the collapse. The webinar covered the underlying causes of the collapse, the financial and economic impact of it in New Zealand, and the extent to which it could happen here.  It also highlighted some key lessons for New Zealand directors from the collapse.

Kenny Malone, co-host of the National Public Money podcast from US National Public Radio, provided the human insight into the SVB collapse. He noted that the “airplane” was nose diving; and then it levelled out and everyone is okay in the end or roughly okay. But for a 72, 80 hour period, all of these start-up companies who had deposited with SVB, including start-up founders, were really facing an existential crisis. Kenny commented on a start-up founder who literally jumped into her car and raced to the nearest Bank of America to try and open a new account there, so she could wire money out of SVB.

Nick Tuffley, ASB Bank Chief Economist, commented on the impact on New Zealand of developments on the other side of the world, such as the collapse of SVB. From the New Zealand context, there are two different channels we need to think about. Firstly, whenever something bad happens globally, invariably it will filter back and impact on our economy. The second thing is related to the financial system. New Zealand is a country in which we are very good at spending and not so good at saving. We always seem to have a constant need to be financing ourselves from the rest of the world.

Nick commented specifically on SVB bank. He noted that SVB ended up with this huge concentration of risk, because a lot of the deposits that it were taking in were in some way linked to the tech sector and start-ups and the owners. He observed one of the key challenges for SVB was linked to its tech sector links. As the sector started to struggle resulting in more cash being withdrawn, that created quite a marked impact on its deposit base. This was compounded by SVB’s inadequate asset diversification and an insufficient focus on risk management within the Bank.

Christine Gorjanc, audit and risk committee chair for a range of New York Stock Exchange listed companies provided a director’s perspective on the governance lessons from the SVB collapse.  She focused on a few key governance lessons:

• Board and audit/finance committee should be considering where a company’s (and other organisation’s) cash is held, the bank’s soundness and the level to which cash holdings are diversified. The latter is no different to diversifying suppliers and customers. This should be part of the treasury policy.
• All boards should have and regularly review their organisation’s crisis management communications plan. Risk will inevitably materialise. Boards need to be ready and every director, particularly the chair, needs to be clear about their role.
• Boards need to be alert to social media and have this considered in their risk registers. This is particularly important to an organisation’s reputation and the narrative about it. In this context, Boards also need to consider the extent to which their Chief Executive is authorised to speak out and on what issues.  Christine noted that people were talking about these issues in their boardrooms in the United States.
• Board audit committees (or similar committees) should typically oversee enterprise risk and ensure that the process, approach and risk identification is well covered. Nick Tuffley noted in the webinar discussion that in SVB’s case, questions have been raised about the oversight and risk management expertise at the bank. He understood that there was a long period where the bank didn't have a chief risk officer. The SVB board’s risk committee board members also didn't seem to have a lot of senior risk management experience.
• Board’s risk management approaches need to be part of and linked to a company’s (or other organisation’s) strategy. This needs to extend to board discussions about risk appetite.