Taking more into account Taking more into account http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\bridge-golden-gate-small.jpg April 28 2023 March 30 2023

Taking more into account

Evaluating nonfinancial factors contributing to the fall of Silicon Valley Bank.

Published March 30 2023
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There’s little question poor governance was at the heart of the spectacular failure of Silicon Valley Bank (SVB), the main culprit of the recent stress in the sector. Time-tested credit research raised enough red flags to keep most prudent investors away, but we believe considering certain material nonfinancial factors could have raised even more.

SVB’s very business model left it vulnerable to a liquidity crisis. Its reliance on a concentrated depositor/lending base—of less-stable tech startups and venture capitalists, to boot—exposed it to potential difficulties in the technology sector. A diversified client base is a critical, and basic, component of banking. Including depositors of all sizes and sectors might have helped it avoid ruin.

Traditional risk controls could have curbed other major missteps. One was its dependence on deposits over the FDIC insurance limit—reportedly more than 90% of its clients. Another was a failure to properly manage interest-rate exposure and liquidity provisions in the face of rapidly rising rates. Weak supervision and inadequate regulation did little to deter the conduct.

But we think SVB management also should have considered the societal shift in how customers interact with banks in the era of the smart phone. Social media made it possible for customers to communicate with astonishing speed as soon as news of its troubles emerged. Banking apps allowed instant withdrawal of funds. To put it in perspective, during the global financial crisis, Washington Mutual’s $16.7 billion run on deposits occurred over nine days; SVB’s $42 billion collapse took hours. It was more a sprint from the bank than a run on it. Confidence is a very real human-centered risk factor—as faith in the bank’s soundness eroded, the possibility of its failure grew.

An institution with blinders forgoes potentially crucial information. Likewise, an investing approach that looks through a wider lens than traditional analysis to incorporate nonfinancial sustainability considerations in our ever-changing world can potentially lessen risk.

Tags Responsible Investing . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Terminology such as “ESG integrated,” “sustainable” or “impact,” among other terms, is not uniformly defined across the industry. Investment managers may understand and apply ESG factors in different ways, and that the role those factors play in investment decisions also varies. Therefore, we recommend investors understand the role of ESG factors in a strategy to ensure that approach is consistent with their investment objectives. Like any aspect of investment analysis, there is no guarantee that an investment strategy that considers ESG factors will result in performance better than or equal to products that do not consider such factors. Investing and making buy-and-sell decisions that emphasize ESG factors carries the risk that, under certain market conditions, the fund or strategy may underperform those that do not incorporate such factors explicitly into the decision-making process. The application of ESG criteria may affect exposure to certain sectors or securities and may impact relative investment performance depending on whether such sectors or securities are generally in or out of favor in the market.


Federated Advisory Services Company