What the Silicon Valley Bank Closure Means for Your Organization
The recent closure of Silicon Valley Bank by the California Department of Financial Protection and Innovation has sparked important discussions on the importance of risk management and the closure’s impact on organizations throughout the country. Bank failures like this one have happened before; however, this most recent failure has been the largest bank to fail since Washington Mutual closed during the 2008 financial crisis.
The Silicon Valley Bank was known for serving start-ups and venture-backed firms. In fact, 44 percent of venture-backed technology and health care IPOs were clients of the Silicon Valley Bank. In short, as interest rates have increased in response to high inflation rates, the bank’s treasury bonds began to lose value. At the same time, many of the bank’s customers began to withdraw large sums of money amid mass tech sector layoffs. To manage this, the bank was forced to sell some of its investments at a loss. While bank failures, such as this one, are often signs of a looming recession, they also have ripple effects that will impact organizations across many industries. Here’s what you need to know and how to prepare.
Long-Term Effects of Bank Failures on Organizations
In addition to Silicon Valley Bank, Signature Bank of New York was also forced to close its doors last month. While the failures have mostly been resolved, it presents a challenge in our systemic banking system. Banks with $50 billion or more in consolidated assets are required to implement a risk committee that reports directly to the bank’s company board. At first glance, this is proper risk management etiquette, however, these boards often lack the expertise to make meaningful changes that protect the bank and its consumers while also reducing major risk. Because of this, we can prepare to see some effects of this failure within our organizations and our daily lives.
- Increased risk of recession. According to Goldman Sachs, this most recent stress on the US banking system has an increased the risk of a recession within the next 12 months. In fact, the bank reports that the American economy has a 35 percent chance of entering a recession within the year. Like any recession, this means mass layoffs across all industries and less consumer spending, both of which dramatically increase economic risk.
- Difficulty acquiring loans. The failure of Silicon Valley Bank has the potential to make it more difficult to secure a loan, whether it’s for an individual looking for a mortgage or a business looking for a loan. Banks under stress are more likely to take a deep dive into one’s credit, as well as tightening the conditions that make it possible to be approved.
- Lay-offs and hiring freezes. With the risk of recession on the rise, companies may be hesitant to invest in hiring and training new employees. In addition, businesses may tighten their spending to ensure profitability within the next quarter.
Good risk management can protect a bank even during times of severe stress. Without experts with real work experience in risk-management, especially within the financial sector, our banks risk repeated failure. Risk experts agree that this failure should serve as a sign that something must change within our banking systems. Moving forward, experts agree that stricter stress testing rules on banks should take place in order to prevent risk to our nation’s stability.
Understanding your organization’s risks includes familiarizing yourself with your partners and lenders. RiskVersity can help. Our team serves as a trusted branch of your organization, helping to research and select solid third-party resources. Contact us today if you want to understand your organization’s risks—and what you can do about them.
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