Upgrading Risk Management through Insights from Bank Failures

The failure of the Silicon Valley Bank (SVB) is a sharp reminder of the value of effective risk management in an ever-changing financial environment. A follow-up analysis by federal regulators found serious deficiencies in SVB’s risk management, including shocking revelations that the bank operated for months without a chief risk officer. This investigation exposed risk management problems in the banking sector, prompting other financial institutions to scrutinize their practices.

As we move into the next decade, it is clear that risk management is evolving, driven by technology and requiring more flexible, proactive and predictive approaches. Banks must move fast to make ready to react to such developments if they are to be resilient and flexible to the changing financial landscape. The following are the crucial areas that banks should focus on, considering the failure of SVB:

1. Address Concentration Risk:

SVB’s unique client base, largely consisting of lenders to early-stage tech firms and fintech companies, proved to be a significant vulnerability. Concentrating too heavily on a specific sector can expose a bank to substantial risks. Therefore, banks should set clear goals for diversifying their client base and regularly monitor their progress in achieving this objective.

2. Manage Deposits Insurance:

Overreliance on uninsured deposits can spell trouble during challenging times. When faced with economic uncertainty, clients with uninsured deposits are more likely to withdraw their funds, potentially causing liquidity issues for the bank. Diversifying funding sources is crucial for stability.

3. Strong Risk Governance:

A strong risk governance framework is paramount. Banks should ensure the presence of a robust Risk organization and succession planning. Independent audits and oversight play a critical role in identifying and addressing vulnerabilities.

4. Eyes on Asset Liability Management Risk:

Constant vigilance is essential when it comes to asset growth, credit quality, and the sensitivity of assets to interest rate fluctuations. Rapid and unexpected changes in these areas should raise alarm bells within the organization.

5. Monitor Credit & Market Risk:

While a bank’s loans and bonds may have good credit quality, market risk and sensitivity to interest rate fluctuations require careful monitoring. A comprehensive risk assessment should consider these factors.

6. Manage Funding & Liquidity Risk:

Banks must be prepared to handle sudden surges in deposits and devise strategies to manage liquidity risk. Rapid deposit influx followed by a mass exodus can pose a significant challenge.

7. Conduct Stress Tests:

Stress testing is invaluable in predicting and addressing issues. Simulating various scenarios, including external and internal forces, helps banks identify vulnerabilities and take proactive measures.

In response to these emerging requirements, technological advancements are reshaping risk management practices. Evolving technologies like data science, generative AI, and advanced analytics empower banks to develop new products, services, and risk-management techniques. De-biasing approaches enhance decision-making, allowing risk managers to make more informed choices.

These technological advances also provide real-time metrics and data crucial for decision-making, including funding information, concentration risk, contractual maturity, and liquidity triggers.

Moreover, banks should invest in nurturing a robust risk culture and actively involve their management in key risk decisions. To remain efficient, flexible, and future-ready, every bank’s risk architecture must undergo a fundamental reassessment, starting with data and reporting.

SLK Data & Cloud Practice offers real-time risk management solutions that support Chief Risk Officers in making critical decisions. Our agile solutions promote standardization and flexibility, helping banks navigate the turbulence of the financial industry. For more details, please refer to our whitepaper on how we assist banks in embracing a more secure future.