Risk Management Lessons from SVB Failure

Silicon Valley Bank CEO, Greg Becker, gave his version of why the bank failed at a Congressional hearing. According to Becker, US banking regulations encouraged SVB to invest in long-term government bonds and the Federal Reserve was signaling that inflation was “transitory” and interest rates would remain low.

My earlier newsletter, Head in the Sand Management – the SVB Case, argued that everyone knew interest rates would rise, and asked, “what were SVB’s senior leaders thinking!!

Here are lessons from SVB’s failure that can be helpful guidance for leaders of all organizations.

1. Customer concentration: Many SVB’s depositors were Private Equity and VC firms and the companies they controlled. These companies withdrew $42 Billion the day before SVB was seized and would have withdrawn another $100 Billion the next day. That level of customer concentration, most of whom know each other, is a risk threat to any company. While winning the big order or great success with one customer category is wonderful, reliance on a single customer or category of customers is a dangerous risk to your business.

2. Compliance is not risk management: In my article, The SVB Collapse – My Board Risk Management Experience, I argue that I, as the CEO or board member, should not look at government regulators as my risk management department, “If I don’t know the bank is in trouble before the regulators, I am not doing my job.” SVB had 1,000 staff members working on compliance and risk management. They may have filled out the required forms and reports, but no one was ringing an alarm about the falling value of the bank’s bond portfolio with rising interest rates. My view is that Becker and the SVB did not need someone to ring a bell for such an obvious risk.

3. Permission to speak: In a tragedy we all remember, the US Space Shuttle Challenger broke apart 70 seconds after launch and seven crew members died. The O-ring seals in the solid-state rocket booster failed. Engineers at NASA and the booster manufacturer Morton Thiokol who designed the booster told their managers that the O-rings might fail in the cold temperatures at the Florida launch site. In a culture of “we are GO FOR LAUNCH,” these warnings were not passed up to NASA leadership. As the leader of your company, whether it is SVB, NASA, or any organization, you will not know what is going on and understand the risks you face unless you give permission to speak. You must create a culture open to hearing from and learning from everyone.

Spring Flowers
Spring in New England can be cold and wet. Flowers love this cold and wet weather. I am amazed every time I look carefully at spring blossoms – intricate, delicate, complex, inviting, proud, bold colors.