Excerpts from the article Why almost everyone failed to predict Silicon Valley Banks collapse By Allison Morrow, CNN Published 8:35 AM EDT, Sun March 26, 2023 Two weeks ago, few people outside the tech industry had even heard of Silicon Valley Bank, the midsize California lender whose rapid implosion would end up shaking the foundations of the entire global financial system. But on the morning of Friday, March 10, after clients withdrew $42 billion in the span of a single day, state and federal regulators swooped in to try to salvage what remained of SVB. In the head-spinning hours that followed Silicon Valley Bank became a global household name, though hardly in a manner its founders would have hoped for: It was officially the second-largest bank failure in US history, after Washington Mutual in 2008...... In the autopsy of SVB, there are clear signs of basic corporate mismanagement, and when mixed with old-fashioned customer panic it proved to be an existential flaw. So why didnt anyone see SVBs collapse coming? Thats likely to be one of the key questions from lawmakers on Capitol Hill next week, in back-to-back House and Senate hearings investigating the banks downfall.

Red flags abound

SVB, founded in 1983, was both a financial institution and a status symbol among deep-pocketed Bay Area businesses and individuals. It catered to a world of venture capitalists known as much for their astounding wealth as their hearty appetite for risk. To bank with SVB was to be a part of an elite club. To embrace a uniquely Silicon Valley ethos that champions boldness, growth and disruption. Much like the start-up clientele it courted, SVB grew at a breakneck pace with assets nearly quadrupling between 2018 and 2021. It was the nations 16th largest bank by the end of 2022, with $209 billion in assets. That should have set off alarm bells on its own.

Red flag No. 1: Breakneck growth

When banks grow quickly, there are red flags everywhere, says Dennis M. Kelleher, CEO of Better Markets. Thats because the managements capacity and the banks compliance systems seldom grow at pace with the rest of the business. In fact, as early as 2019, four years before SVBs downfall, the Federal Reserve warned the bank about its insufficient risk-management systems, according to reporting from the Wall Street Journal and the New York Times. Its not clear whether the Fed, SVBs primary federal regulator, took action on that warning. The central bank is reviewing its oversight of SVB...........

Red flag No. 2: Hot money

Virtually all 97%, according to data from Wedbush Securities of SVBs deposits were uninsured. Typically, US banks finance 30% of their balance sheets with uninsured deposits, said Kairong Xiao, a professor at the Columbia Business School. But SVBs was a crazy amount, he says........ SVBs over-reliance on these deposits made it extremely unstable. When a few members of its tight-knit, social-media-engaged community of clients began to worry about the banks viability, the panic went viral.

Red flag No. 3: The clientele

Silicon Valley Bank was known for working with young tech start-ups that other banks may have shunned. When those start-ups flourished, SVB grew alongside them. The bank also managed the personal wealth of those start-ups founders, who were often light on cash as their fortunes were tied to equity in their companies.

Red flag No. 4: Risk management 101

A casual observer of Silicon Valley Banks financial position even a month ago would have had little reason to be alarmed. The bank wouldve appeared to have been healthy, if you look at their capital position, their liquidity ratios...they wouldve been fine, said John Sedunov, professor of finance at Villanova University. Those traditional big-picture things, the front page items...They should have been fine. Silicon Valley Bank held an unusually large proportion (55%) of its customers deposits in long- dated Treasuries. Those are typically super safe assets, and SVB was hardly alone in loading up on bonds in the era of near-zero interest rates. But those bonds market value decreases when interest rates go up. Typically, a bank hedges its interest rate risk using financial instruments called swaps, effectively exchanging a fixed interest rate for a floating rate for a period of time to minimize its exposure to rising rates. SVB appears to have had zero hedges in place on its bond portfolio...........

Red flag No. 5: The missing CRO

For the past year, the Fed has jacked up interest rates at an unprecedented pace in the modern era. And for most of that year, Silicon Valley Bank was operating with a massive vacancy in its corporate leadership team: a chief risk officer. Not having a chief risk officer is sort of like not having a chief operating officer or a chief auditing officer, said Art Wilmarth, a George Washington University law professor and an expert on financial regulation. Every bank of that size is required to have a risk management committee. And the CRO is the No. 1 person who reports to that committee. For a chief risk officer to be absent for eight months, as SVBs was, is astonishing, Wilmarth said.

In theory, a CRO would have been able to spot the outsize risk posed by the dwindling value of the banks long-dated bonds, which combined with its outsize deposit risk, would merit a course correction. But even without a CRO, theres little excuse for SVB having no apparent hedges on its bond portfolio. Several experts who spoke to CNN said its likely that people within SVB knew about the risks but let them slide. After all, the bank was well-capitalized. It was profitable. And hadnt the regulations since the 2008 crisis made all banks safer?............ Source: CNN Business Required: The above article identifies several reasons for the collapse of SVB among which managing risk is considered as a central issue. In your opinion how could have SVB avoided such a collapse? In your answer specifically identify which financial risk(s) were central to the mismanagement of risk and how could have they better managed these risks