Risk Management: 3 Lessons from the 2023 Banking Crisis

The collapse of Silicon Valley Bank (SVB) and Signature Bank underscores the ramifications of neglecting risk management in banking.

Both banks had the highest proportions of uninsured deposits across the entire industry. At SVB, furthermore, customers could withdraw deposits without notice. SVB had a severe risk of cash shortages as this money would sit in long-term investments.

Banks like SVB and Signature Bank are prone to failure because they lack a stable governance framework to assess, mitigate, control, and report risks. What risk management banking strategies can we learn from this recent banking crisis?

Lessons from the Banking Crisis

Our full analysis of the 2023 banking crisis, its impact, and its repercussions are here. Below are 3 key strategies that banks can learn from this crisis. 

1. Focus on the “G” in ESG

SVB was highly rated by ESG agencies since it attracted many renewable energy companies. Fixating on the environmental and social part of ESG without giving the governance aspect appropriate attention poses a high risk. Accountability and transparency in decision-making are essential to risk management in banking.  

2. Prepare for Increased Regulations

Banks could encounter an increase in regulatory oversight. Based on our analysis, here are some likely changes. 

  • FDIC may decrease the deposit threshold for the FDIC Insurance Limit from $250,000 to $100,000 for mid-sized banks.
  • Smaller banks may need to show losses or gains on AFS (available for sale) assets in their Core Tier 1 calculations.
  • The federal reserve may ask mid-sized banks to keep a high proportion of their liquidity in cash with a central bank.

3. Reassess Risk Management Banking Practices

SVB and Signature Bank inadequately managed interest rate risk, with ‘loans + HTM total deposits’ at ~94% for SVB and ~93% for Signature. Their HTM portfolios rapidly lost value when interest rates increased. Comprehensive and effective risk management in interest rates, funding, mismatch, market liquidity, and other areas is crucial for banks to manage their liabilities.

Evalueserve offers financial risk services and AI-enabled solutions to help banks identify and mitigate risks early, avoiding the costly consequences of poor risk management. We can help you navigate changes brought about by the 2023 banking crisis with ease. To speak to an expert today, visit https://www.evalueserve.com/speak-to-expert/

Tammy Duong

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