In the fast-paced world of finance, it's easy to get swept up in the latest trends and forget about the fundamentals. SVB's recent crisis is a stark reminder of the importance of basic risk management practices. Here are some insights we can learn from their missteps.
1. Money can be a double-edged sword. SVB was suddenly flushed with Deposits and took unnecessary risks chasing high yields in Mortgage-Backed Securities (MBS) fka Weapons of Mass Destruction, despite warnings of higher interest rates globally. They invested over USD 70 billion in MBS, which ultimately led to trouble. The problem of plenty.
2. In uncertain times for financial markets worldwide, having a Credit Risk Officer is critical. The role of the board becomes even more important in such situations to fill the Critical leadership positions
3. Customer diversification should not be limited to sectors alone. Size and stage also matter. Being primarily a bank for startups may have created a systematic risk.
4. Waiting for regulators to tell you what's good for your company and customers is a mistake. Only the top 15 largest banks are subject to Stress Tests, and SVB was ranked 16th. It's important to take proactive measures to optimize risk management.