Recent events with Silicon Valley Bank (SVB) have been the talk of the town over the past few days. 

The collapse of commercial banks has been a recurring theme in the global financial system. The events of the 2008 financial crisis led to the collapse of several large banks, exposing systemic vulnerabilities and weaknesses in the regulatory framework.
Assessment of the current market conditions will be left to those who are better suited to deliver information on that matter, however it is clear that the circumstances of SVB are not to be lightly looked over for many companies across various industries, not just the financial sector. 

The collapse of the bank has highlighted the need for banks to have effective risk management and operational resilience frameworks in place. 

We discuss in this blog 3 key points that operational risk consultants should be aware of when handling the affairs of commercial institutions, whether pre- or post-high inflation rates.

Before we go into those, here’s a brief recap of what led up to where we are today.
Do bear in mind that the story is continuing to unfold on a daily basis at the time of writing this article. 

The collapse of Silicon Valley Bank was caused by a combination of factors, but primarily it was the Federal Reserve's decision to raise interest rates which burned them most; the bank's heavy investment in government bonds at low interest rates, and the struggles of its loan portfolio due to a downturn in the technology industry. These factors ultimately led to the bank's insolvency and closure.

Which leads us to what operational resilience consultants might now want to consider going forward.

Commercial finance clients must ensure that they have adequate capital to absorb losses during periods of financial stress. In the case of Silicon Valley Bank, its capital adequacy was insufficient to absorb the losses incurred due to the increase in interest rates. Operational resilience consultants should ensure that commercial financial clients they work with have sufficient capital buffers to absorb losses during periods of financial stress. They should also ensure that banks have appropriate risk management frameworks in place to manage risk effectively and make informed decisions.

Liquidity risk, is the risk that a financial institution may not be able to meet its obligations when they fall due. In the case of SVB, it faced liquidity risk due to its inability to liquidate its assets to meet its obligations. Operational resilience consultants should ensure that commercial banks have adequate liquidity buffers to meet their obligations during periods of financial stress. They should also ensure that their commercial finance clients have effective liquidity risk management frameworks in place to identify, measure, and monitor liquidity risk effectively.

Effective governance and oversight are crucial for the success of any financial institution. In the case of SVB, its board of directors and senior management didn't do the best job in providing adequate oversight and governance to prevent critical matters happening, resulting in the bank's collapse. Operational resilience consultants should do their best to ensure that commercial banks have effective governance structures in place, including a robust board of directors and senior management team. They should also prepare commercial financial clients to have appropriate oversight frameworks in place to monitor and manage risk effectively.

With so many cogs to be aware of in situations like these, we wanted to ensure you were left with a well rounded list. 

Scenario planning is a factor that operational risk consultants should make a priority to explore rigorously with clients. Stress testing, and contingency planning to minimize the impact of such risks. By developing a deep understanding of the banks' risk exposure, consultants can help banks develop a robust operational risk management framework and identify any areas where improvements can be made. This way, commercial finance clients can be better prepared to address the challenges of similar issues like our case study has experienced.

Operational resilience is critical for the survival of commercial banks, especially during periods of financial stress. The collapse of Silicon Valley Bank highlights the need for banks to have effective risk management and operational resilience frameworks in place. Operational resilience consultants should ensure that commercial banks they work with have adequate capital buffers, effective liquidity risk management frameworks, and robust governance structures in place to manage risk effectively. By doing so, they can help commercial banks navigate through periods of financial stress and ensure their long-term survival.

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