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What are the top operational risks for banks in 2023?
Hugely popular with tech start-ups in the UK and US, Silicon Valley Bank has become the biggest bank to collapse since 2008.
HSBC has bought the UK arm of SVB in a deal brokered by the UK government and the Bank of England. In the US, the Federal Reserve stepped in on Sunday to make sure US depositors were protected.
The collapse shows that the commercial banking sector is equally as vulnerable to inadequate risk management protocols as investment banking – something Acin and a leading consortium of banks is improving with better data and industry collaboration.
But how did SVB’s collapse happen and what can be done to avoid a repeat scenario?
SVB’s asset and liability structure were not in line.
Due to a boom in venture capital funding, SVB’s deposit balances more than tripled to $198 billion (USD) between the end of 2019 and the first quarter of 2022, with the bank investing most of these deposits in bonds.
SVB’s strategy was centred on sheltering some of its liquidity in short term available for sale securities while targeting yield with longer term held to maturity book.
When interest rates started to rise in a response to inflation, mortgage assets were hit and SVB’s unrealised losses spiralled to $16 billion (USD) in September 2022, leading to a run on the bank.
SVB operated without a Chief Risk Officer for eight months in 2022. As this is a critical role in managing financial and non-financial risks faced by a bank, it is unclear how the bank managed their risk during this time.
‘The SVB collapse is a time for reflection for the financial services industry. It’s a chance for firms to learn from the market and peers and evaluate the effectiveness of their risk management frameworks.
‘At Acin, we are helping our clients implement a data driven quantifiable approach to non-financial risk management to provide risk leaders and boards assurance that they are moving towards industry best practice.’
Paul Ford, CEO, Acin
Risk management is the safety net that allows a bank to operate effectively.
A firm’s risk committees and risk managers evaluate and discuss risk scenarios (the ‘what ifs’) while ensuring the necessary risk controls and alerts are in place to mitigate emerging threats.
The Bank of England’s Systemic Risk Survey Results 2022 (H2) flagged inflation risk as ‘the most challenging risk to manage for firms’, something SVB were not able to adequately navigate, exacerbated by a lack of CRO in their structure.
SVB’s lack of CRO is not the first time their approach to risk management had been in focus.
In 2015, SVB CEO Greg Becker asked US lawmakers to rollback part of the Dodd-Frank Act to reduce ‘significant regulatory burdens’. The rollback was passed in 2018 in the biggest deregulation effort since the 2008 financial crisis.
By having a comprehensive risk framework in place, firms are better able to react to threats and avoid regulatory and reputational damage.
SVB’s collapse shows that risk mismanagement can have huge consequences for a firm and their customers and should act as a reminder for other firms to reassess and optimise their risk processes.
Acin’s mission is to make the financial services system safer, through a data-driven, networked approach via our four product lines:
Our AI driven assessment tools analyse and categorise a firm’s data, outlining non-controls, unclear risks and controls, and control duplication, as well as detecting inconsistencies.
We are expanding our networked data driven approach to ensure risk and control completeness from corporate and investment banking to retail and commercial banking, working with key clients and investor banks.
Our Intelligence tool allows firms to dynamically assess your risk control environment against external triggers. Clients receive news and regulatory alerts alongside risk scenarios to make sure they are always up to date with industry developments and emerging threats.
Firms can quantify their risk control completeness and performance, using Acin’s quantification methodologies and comparing to their peers on our network.
Acin may not be able to able to single-handedly protect a firm from collapse, but our tools and insights give financial institutions the upper hand in protecting their interests.
Want to know more about Acin? Get in touch today.
This article was published on 13 March, 2023.
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