Lack of Chief Risk Manager

One of the major lessons from the SVB collapse is the importance of having a chief risk manager in place. According to reports, SVB did not have a chief risk manager for eight months before the collapse. This is a critical position in any financial institution, as the chief risk manager is responsible for overseeing and managing the bank's risk management activities. Without a chief risk manager, there may be no one to oversee risk management activities, and this can lead to disastrous consequences.

In addition to the lack of a chief risk officer, experts note that the board's risk committee was thin on risk expertise. The board's risk committee is responsible for overseeing the bank's risk management activities and ensuring that appropriate risk management protocols are in place. Without adequate expertise on the risk committee, the bank may not have had the necessary oversight and guidance to manage risks effectively. It was in fact criticised for not having adequate risk knowledge to act in the best interest of shareholders.

Despite these challenges, reports indicate that the risk committee met 18 times in 2022, which indicates that the bank's leadership realised that trouble was afoot. However, experts note that 18 meetings may not have been enough to adequately manage the risks in a financial institution exposed to government debt and hikes in interest rates.

Risk management meetings are critical for identifying potential risks and developing strategies to mitigate them. Without enough risk management measures, the bank may not have had a complete understanding of its risks and may have been unable to respond effectively to emerging risks. The sales side may have also had more discretion to take risks which increased the exposure of the Bank to collateralised debt.

SVB’s investment strategy, which included pouring billions of dollars into U.S. Treasuries and government-backed mortgage securities, has fallen under heavy scrutiny. The securities, which the bank had intended to hold to maturity, lost value as the Federal Reserve hiked interest rates. As worried customers withdrew deposits, the bank on March 8 sold a $21 billion portfolio at a $1.8 billion loss to shore up liquidity.

Of the $212 billion in assets SVB reported for the fourth quarter of 2022, ‘at least $68 billion of this was mortgages with a high degree of interest rate risk.’ SVB’s bankruptcy filing on Feb 24th said $57 billion of those mortgages were government-sponsored enterprises such as Fannie Mae and Freddie Mac. A little more than $10 billion were fixed-rate collateralised mortgage obligations.

“They also had this huge unrealised loss of $11 billion” from those mortgage-backed securities, according to Morris Pearl a former Managing Director of BlackRock.

Overall, the collapse of Silicon Valley Bank highlights the importance of having a strong risk management structure in place, including a chief risk officer with adequate expertise, a risk committee with appropriate oversight, and regular risk management meetings. Financial institutions must prioritise risk management to prevent future collapses and ensure the safety and stability of the financial system.

Often when hiring Risk and Compliance officers the bank or investment firm assigns stringent budgets to the hiring of competent professionals. The cost of hiring and budgets can be significantly lower than for the front office, but a key takeaway from SVB is that an institution has an obligation for its survival and future, as well as to its shareholders, to hire adequate and competent Risk officers who are willing to speak up and actively highlight over exposure to one particular investment and know when the risks are too high.

Could SVB’s collapse have been avoided? We think so. No explanation was provided as to why the CRO left pursuant to a separation agreement; nor was there a strong sense of urgency in finding her replacement? Was SVB’s board over confident of their capabilities and presence? Possibly but again a key lesson to learn is to not take risk, compliance or legal for granted.

As a legal, risk & compliance recruiter I place senior managers into global institutions to protect the value and continued success of the organisation. If you have pressing needs in risk, compliance or legal right now, contact me for a candid conversation about how I can assist your organisation to stay on top and manage risk before it’s too late.