SVB Collapse - Another Corporate Compliance Cautionary Tale | MinuteBox Cloud Entity Management

SVB Collapse - Another Corporate Compliance Cautionary Tale

On the weekend of March 11, 2023, a sense of deja-vu settled over much of North America. It was an unsettling series of financial setbacks that dangerously paralleled the 2008 financial crisis. What was the trigger of these unnerving reminders from the ‘08 global financial disaster? It was the collapse and insolvency of Silicon Valley Bank.

The SVB collapse triggered a wave of panic as investors rushed to pull their assets out of risky portfolios. The biggest loser in this latest bank run was Signature Bank, a massive entity with deep ties to real estate and legal industries. Seized by US regulators mere hours following the collapse of SVB, the Signature Bank collapse marked the third-largest bank failure in US history.

US Treasury Secretary Janet Yellen announced on March 12, 2023, that all SVB and Signature Bank customers will be “made whole” in an attempt to calm the brewing storm in the financial sector. Her efforts appear to have done the job, as markets rallied on March 13, 2023, a sign that her reassurances injected much-needed positive energy across the country. The worst damage appears to be limited to the US, as Canadian officials assured residents that the SVB fallout on the northern side of the border would be very low.

How did Silicon Valley Bank collapse?

Mark T. Williams, a former examiner for the US Federal Reserve, describes the SVB collapse as “a colossal failure in asset-liability risk management.” Other venture capitalists laid the blame on decisions by the SVB CEO and CFO to liquidate assets that had lost significant value as a result of rising interest rates.

SVB Financial Group, the parent company of SVB, reported selling $21 billion of bonds on March 8, 2023. The bonds had lost significant value against rising interest rates, and the sale resulted in an after-tax loss for the company of $1.8 billion for the quarter.

This reckless decision followed an earlier maneuver by SVB Financial Group CEO Greg Becker to sell off personal SVB stock valued at $3.6 million. SVB Financial Group CFO Dan Beck also made questionable sales of shares prior to the outright collapse of the bank. Collectively, these actions triggered a wave of panic that forced the institution into insolvency.

SVB had no Chief Risk Officer since April 2022

According to the company’s own records, there has been no Chief Risk Officer overseeing risk management issues at SVB since April 2022. Those same records show that the number of meetings chaired by the company’s risk committee more than doubled in the past year.

As the company divested assets from its stock portfolio in a blatant effort to rebuild capital, SVB customers rushed to withdraw $42 billion of cash in less than 48 hours. All these actions: the losses from the sale of stocks, the client loans devalued by higher interest rates, a lack of diversified banking customers (SVB primarily tailored to Silicon Valley tech startup firms)—created a chain reaction that led to the collapse of the bank.

A Chief Risk Officer and a properly functioning risk committee might have relayed the risk management concerns of poor fiscal decisions to the company’s CEO and CFO. Presumably, those stark warnings would have prevented those decisions from being made, which might have avoided the outright bank collapse.

SVB collapse comes on the heels of the FTX collapse

The SVB collapse is another reminder of the pitfalls of overinvesting in nascent industries. The SVB collapse comes only months following the collapse and disgrace of FTX, a cryptocurrency firm that engaged in a series of alleged cases of fraud.

While the end results are identical, there is a key difference between the two cases. The SVB collapse appears to have been the result of poor risk management policies and extremely short-sighted decisions on disbursing assets and liabilities. The FTX case involves criminal charges that have led FTX founder and former CEO Sam Bankman-Fried into criminal indictments that risk significant jail time.

Use entity management software and don’t be like SVB

Since the lack of a Chief Risk Officer in the SVB executive hierarchy played a major role in the bank’s collapse, the case serves as a sharp reminder for other business entities. It’s important that you have proper managers, established organizational charts, and clear corporate compliance policies in place to avoid making these same mistakes.

Entity management software is one of the best resources to help implement corporate compliance policies. You can build a detailed org. chart within the platform, creating an organizational hierarchy and chain of command to manage all important business decisions.

If there are any decisions with potential legal consequences, your team can review the org. chart and use the platform to create diligent minute book records documenting how those issues are managed. Additionally, you can send any documents that require signatory approval - for items such as the sale of company stock - to the appropriate executive. You can include the transfer, signature, and filing of those documents in your minute book. This will help ensure your entity manages all decisions with appropriate, and logical strategies.