Silicon Valley Bank: Risk Management Missteps Explained

  • March 16, 2023
  • Quantivate

As news of the collapse of Silicon Valley Bank (SVB) and the subsequent shutdown of Signature Bank of New York circulated over the past week—marking two of the three biggest failures in U.S. banking history—the banks’ risk management practices have come under the microscope.

In SVB’s case, missteps in managing concentration risk, interest rate risk, liquidity risk, and stress testing resulted in a “risk management nightmare” for the bank.

“Compounding SVB’s problems was an apparent lack of risk management oversight by the board and the risk team,” the Global Association of Risk Management Professionals (GARP) reports in an analysis of the failure.

“SVB had a risk committee charter documenting all the components of risk management that should be in place to manage risk effectively. So, clearly, there was a disconnect between what they said on paper and their actions.”

Furthermore, these risk categories can’t be viewed in silos if financial institutions want to conduct effective risk governance. Let’s look at a few key areas of bank risk management that contributed to SVB’s failure:

Concentration Risk

A bank may face concentration risk — or exposure to potential losses large enough (relative to capital, total assets, or overall risk level) to threaten its health or ability to maintain core operations — when its deposit base isn’t well diversified.

SVB, a regional bank serving fintech and crypto businesses as well as the venture capitalists who fund them, has depositors concentrated mostly in one industry. SVB has assets on its balance sheet in the form of commercial loans to borrowers and marketable securities available for sale. The bank also has liabilities on the balance sheet in the form of deposit accounts to depositors.

Moreover, many of the bank’s customers also have something else in common: deposits well over the FDIC insured limit of $250,000.

This creates a potential issue with the deposit composition of the bank because one could expect those depositors (and their deposits) to move in unison. This creates risk that if there were to be deposit runoff, like SVB experienced with a single-day run of $42 billion, it could be swifter than if the bank had a diversified deposit base.

Interest Rate Risk

Rapidly rising or falling interest rates create interest rate risk for banks, but how did this play out at SVB? Let’s look at loans, deposits, and marketable securities.


SVB has commercial loans where the interest rate charged to borrowers increases along with the Federal Reserve interest rate. These are extremely short-duration assets. There could also be fixed-rate term loans on the balance sheet, and these would likely have low interest rates if they were originated during the past few years in the low interest rate environment.


Banks may have interest-bearing deposit accounts and have to increase the interest rate paid to depositors, or else customers could move their money to institutions (such as online banks) paying higher interest rates, causing deposit runoff. These are short-duration liabilities. The institution could also have long-term Certificates of Deposit where they are paying a low interest rate for a certain amount of time. These are longer-duration liabilities.

Marketable Securities

A rapid increase in interest rates can also impact other assets, such as investments in marketable securities. During the pandemic, when interest rates were extremely low, most banks had excess liquidity. If the institution invested in marketable securities, those securities would naturally be paying a low interest rate.

Banks need to understand the risks involved with a decision to invest in long-term securities, because if interest rates increased, the marketable value of those securities would fall, and that could create a problem if those marketable securities had to be sold. Institutions in this scenario face an asset/liability mismatch, which sets the stage for liquidity risk.

Liquidity Risk

Liquidity risk is the risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due without incurring unacceptable losses.

Assume the bank was very slow in increasing the interest rate it paid on deposit accounts, and deposit runoff was very brisk. Assume that some other factor was also impacting deposit runoff, such as fear of a bank run, leaving the institution in a liquidity crunch.

The institution can address the liquidity crunch by selling assets, such as the marketable securities. This is the point where the regulatory examiner leans over the table and asks, “At what cost?”

As discussed above, if those marketable securities were long-term and low-rate, then the institution will realize a significant loss on that sale, due to their value decreasing as interest rates increased. That loss could be unacceptable.

Stress Testing

How does a seasoned chief risk officer (CRO) manage the above risks? First and foremost, with adequate stress testing, even if it isn’t a regulatory requirement.

For SVB, stress testing scenarios would need to consider deposit composition and understand that deposits could move in unison, much swifter than in a bank with diversified deposits.

Stress testing scenarios would also have to consider the “at what cost” question that any regulatory examiner would ask about the selling of long-duration, low-interest-rate marketable securities in a high-rate environment. Well-designed stress testing would have taken a CRO to the outcome, long before it happened, allowing management to mitigate the risk. Stress testing helps management effectively correlate the various risks and their impact to the bank overall.

Risk Management Lessons from SVB

Poor risk governance and management, including an eight-month gap when the bank didn’t have a chief risk officer, proved disastrous for Silicon Valley Bank.

“In the case of SVB,” GARP sums up, “the bank’s ultimate demise was fueled by [an] unusual confluence of events: over-concentration in a volatile sector, and poor investment strategy, risk management practices and board risk oversight.”

Financial institutions need a proactive, holistic approach to risk oversight to navigate the uncertainty of unpredictable economic conditions and a constantly evolving risk environment.

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