What CEOs can learn from the fall of Silicon Valley Bank
When Silicon Valley Bank was shut down on March 10th, it came as a shock to many in the tech and finance community.
Unless you were a customer or employee, chances are this was the first time you had heard of this bank. You might be asking yourself now, what went wrong, and what does this mean for the future of banking?
The fall of Silicon Valley Bank is a rare event. It should not be taken as a sign that the banking industry is in trouble but rather as a reminder for CEOs to think about the possibility of a bank failure and how it would affect their business.
Here’s What Happened:
In the end, no depositor lost money, but the aftermath of the SVB downfall may see lingering consequences for months to come.
The tech startup sector has had its fair share of growing pains in recent years.
Pre-pandemic and at the peak of the pandemic, tech companies were flooded with cash from both COVID relief efforts as well as new funding opportunities from banks such as SVB.
Although SVB set out on a noble premise to help tech entrepreneurs grow their companies by providing loans and investment opportunities, their strategies did not stand a chance against rising interest rates and cash flow crunches.
Ultimately, what led to the downfall of SVB was not simply due to risky investments in startup companies.
SVB had been at risk for a while due to its decisions to invest heavily in bonds which decreased in value as interest rates continued to soar.
If the bonds were able to mature, the money would have come back with interest – but as soon as the bank’s clients started to panic, they ran to the ATM and withdrew all of their cash.
This reaction from concerned customers resulted in SVB experiencing a bank run and being forced to sell its bonds at a loss, leading to its insolvency.
What You Need To Know:
Although uncommon, the possibility of a bank failure is something every CEO has to think about.
Historically, when a bank run occurs, the government steps in and guarantees deposits, even those above the $250,000 FDIC-insured limits.
However, there are no guarantees that this will happen if your bank goes under. The government also has no obligation to pay interest on these deposits until they are repaid by the failed bank’s assets.
It’s important for CEOs to understand what happens when their bank fails and how it could affect their business. Here’s what they need to know:
Your funds are insured up to $250,000 per bank, per account type.
If you have a joint account with a spouse or business partner, rest assured that each individual is insured for up to the full amount.
Lessons To Learn:
The importance of stress testing.
SVB’s crash was due in part to its lack of planning and stress testing—a core tool that financial firms use.
Stress testing can vary from simple one-time scenarios to complicated risk models.
In retail banking, a stress test seeks to evaluate the results if something bad were to happen.
This test looks at everything from interest rate changes to credit risk and liquidity.
If you want to learn from SVB’s mistakes and failures, consider doing a stress test on your own business.
Stress tests can provide valuable insights into how well prepared you are for severe but plausible adverse events.
Diversify your assets and streams of revenue.
If possible, open accounts at several FDIC-insured banks so that if one of them fails, you will not lose your entire savings.
Additionally, don’t be too dependent on one source of revenue – Make sure that all aspects of your business are generating revenue streams so if one area dries up due to an economic downfall, you can focus on what’s most important.
It is important to note that SVB, like many companies before them, was not a victim of a single mistake but rather the cumulative effect of multiple problems.
Always be aware of your position and how you got there. The best way to stay protected is to learn from the mistakes made by others and apply those lessons going forward.
Louis Mamo & Company is here to help you with any lingering concerns or questions you may have.
Whatever stage of business you are in, we have the practical experience and expertise that can help strengthen your financial foundation. Reach out to us today!