Challenges of Financial Services That Led to SVB's Failures - and What's Coming Next
If you’ve turned on financial news or flipped to the finance section of the newspaper, you’ve no doubt heard of Silicon Valley Bank (SVB) - and its collapse. While there were many causes of the bank’s failure (read more on the subject and FP&A best practices that would have helped the bank avoid calamity), common challenges of financial services no doubt played a part. It’s worth examining these challenges for financial services and how they contributed to the bank’s collapse.
How Legacy Challenges for Financial Services Activities Hurt SVB
You may be thinking ‘so what’, the banks got backstopped (read: bailed out) by the Federal Deposit Insurance Corporation (FDIC). Essentially, the US Federal Government has more or less signaled that if your bank is large enough, your full deposits are guaranteed - no need to worry.
But that’s not the full story. And in the wake of SVB’s bankruptcy (and Signature Bank’s) there may be some important changes on the way regarding banking regulation that could, in turn, exacerbate current FP&A challenges for unprepared organizations.
Luckily, we’re here to point those out so you can identify both financial planning problems and solutions.
Banking Regulation Future and the Future Challenges Faced by the Financial Services Sector
In order to better understand how FP&A challenges and banking regulations intersect, we need to go back a bit with a short banking regulation history lesson (I know - it doesn’t get much more exciting than this, but it’s important!).
The FDIC was created by the Banking Act of 1933 as an attempt to prevent a future Great Depression by guaranteeing deposits in banks so that there wouldn’t be another run on the bank.
The act also separated commercial banking from investment banking as a way to insulate the broader economy from risky trading, which was in turn repealed in the 1990s and contributed to the financial crisis of 2008, but that’s a story for another time - but that’s a financial tale for another time.
In any case, the FDIC now insured depositors’ assets held in banks - up to a point. That point was supposed to be $250,000 as of 2023. For most people in the US, that’s plenty. But that doesn’t cut it for larger companies and ultra high net worth individuals . . . which SVB tailored their services to; almost 94% of those deposits were uninsured (meaning the accounts had over $250,000 in deposits).
The FDIC took unprecedented steps, as mentioned above, of guaranteeing all of the bank’s depositors - even the technically uninsured - and making them whole.
This has led many to believe that, despite what Treasury Secretary Janet Yellen says, basically all large banks are now fully insured, if not in name, then in practice. And that has led to some finance leaders breathing a sigh of relief, taking their eyes off FP&A challenges like risk management because, hey, their deposits are now guaranteed . . . right?
Financial Planning Problems and Solutions in the Wake of SVB
As the post mortem of SVB continues, one thing is abundantly clear: regulators, policymakers, and bankers were all to blame.
For instance, one of the reasons cited for bailing out SVB was due to the potential for contagion, meaning in this instance creating a run on the banks as anyone with over $250,000 in a single account would begin to worry - especially if those holdings are in smaller banks.
But the bank lobbied (and it’s worth noting that the SVB CEO was on the regional Federal Reserve board overseeing the bank) to reduce regulatory burdens in the Dodd-Frank Act (the main legislative response to the financial collapse of 2008) for ‘smaller’ banks, changing the threshold that stricter liquidity requirements and other regulations kick in to $250 billion in assets, opposed to $50 billion.
In fact, part of the bank’s argument for this deregulation was that they were in fact too small to pose a contagion risk . . . which is the inverse of the argument they then used now to argue for a bailout.
This has naturally sparked outrage among some of the more financially savvy politicians:
- Katie Porter, a congress member from California, is seeking to repeal the deregulation that raised the liquidity requirement threshold
- Elizabeth Warren, a senator from Massachusetts, has called the same deregulatory maneuver the “Bank Lobbyist Act” and will likely seek to have it repealed
- Bernie Sanders, a senator from Vermont, wants to put in place legislation that will prevent bankers from being able to serve simultaneously as regulators
And that’s just the beginning. While it’s uncertain if all, some, or any of these political actions will bear fruit, there is at least a sentiment in both political Houses that the system needs to change.
So while you may believe your deposits are safe (even if they are uninsured), that may very well change soon.
And that brings us, finally, to our financial planning problems and solutions.
Risk Management with FP&A Financial Models
All the politics and financial complexity aside, SVB could have avoided this whole mess with a bit of risk management. In fact, FP&A modeling can help put an end to one of the most common challenges faced by the financial services sector.
One of the major benefits of an effective FP&A solution is that you can easily perform forecasting and what-if scenario planning. With a few clicks, you can add any parameters and contexts you like in order to get a better understanding of your financial health and readiness should major economic shifts take place.
Learn more about our FP&A solution:
One thing that SVB did wrong was invest heavily in mortgage-backed securities and treasury bonds - two stable investments in normal times, but ones that are particularly susceptible to interest rate rises.
SVB suffered from recency bias - interest rates had been so low for so long, many of their financial planners and investors simply assumed it would never change. But then rates did change, and SVB was left holding the bag, as it were.
By using FP&A financial models, they could have been more aware of just how weak they were to interest rate rises. Using sophisticated FP&A modeling, it would have been immediately apparent that some diversification was needed.
It’s too late for SVB - but not for your organization!
Put an End to Your FP&A Challenges with Limelight FP&A Software
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