@bigbadwolf
Interesting take on SBV (and smart to offer it without comment), but let's be honest here: what did you expect from an institution that was entrenched with startups (the "innovation industry"), whose population is mostly young people who actually care about inclusion, climate change and whatnot? Caring about what their customers care about is business strategy. I'd dare say that all companies do this - woke or not.
I do think the fact that they didn't have a Head of Risk Management was most definitely a huge red flag for any bank. No one to bring cohesiveness to their risk strategy, and [arguably / hopefully] anticipate the liquidity issues that were building up.
That said, the whole "they didn't have a Head of Risk, but they had a Chief of Diversity -->
hence, they were prioritizing woke ideologies -->
thus, they failed" train of thought is quite the conjecture in my mind. Obviously, the whole issue was more complex than that, and there were other totally unrelated fundamental dynamics at play that ultimately were the actual cause of the bank's collapse - which for whatever reason don't seem to make their way into politically charged blog posts and news articles (go wonder!).
At the end of the day this was a text book bank run. Except that the run happened over 48 hours as opposed to over a couple of weeks (like in the good old days) because modern technology made it easier to spread the panic. If anything we could blame messaging apps just as easily as we could diversity.
I feel like we all know this at this point, but to err on the side of clarity:
- SVB had a huge portfolio of AFS and HTM long-duration securities losing meaningful value due to interest rate hikes starting in 2022
- Slowing VC funding since Q3'22, coupled with elevated cash burn (probably linked to high inflation to a degree), translated into clients withdrawing funds at an accelerated rate
- SBV announced the sale of their AFS portfolio booking a $1.8 billion one-time loss to keep liquidity issues contained
- People read into the announcement and panic ensued - VC firms advised their portfolio companies to withdraw all their deposits, and everybody did just that... all at once
What people might not know is (and mostly just for context for all them Risk Management junkies out there):
- From a regulatory stand point, as of Q1'21 SBV met the Category IV threshold for stress testing purposes ($100 to $250 billion in total consolidated assets). In other words, SBV became subject to biennial supervisory stress tests and stress capital buffer assessment
- SBV was given until the end of 2024 to comply with these additional requirements
- As fate has it, SBV failed before it actually ran these assessments
- Before meeting the Category IV threshold, SVB could opt-out of including Accumulated Other Comprehensive Income (AOCI) in their CET1 ratio (an option available for Category II banks and below)
- So when the rate hike cycle began, their AFS portfolio mounted unrealized losses (AOCI) but their CET1 ratio wasn't reflecting this
- The rollback of the Dodd-Frank Act in 2018 made it possible for "smaller" banks to NOT have to fully comply with enhanced prudential standards - yes, happened under Trump, but worth noting this was a bipartisan initiative
- Liquidity Coverage Ratio - Category IV banks are no longer subject to LCR if they meet a couple of conditions (related weighted short-term wholesale funding (wSTWF)) - this effectively replaced something called the Modified LCR that was in place before for banks this size
- Net Stable Funding Ratio - Category IV banks not subject to it, and subject to a reduced version of it at best (also related to wSTWF conditions)
- Liquidity Stress Testing - Category IV firms subject to quarterly testing, while larger firms are subject to monthly testing
- So the punchline is that despite becoming a way larger bank over the course of 2021 (larger systemic risk issue), SBV was subject to less rigorous regulation than before the Dodd-Frank rollback
apnews.com
