Taking more into account
Evaluating nonfinancial factors contributing to the fall of Silicon Valley Bank.
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.