Post-Graduate Diploma in Management

(PGDM-BFS)
Section-A

Course Title- Risk Management I

Course Faculty- Prof. Neharika Sobti

Assignment- Silicon Valley Bank

Submitted By- Rahul Saini (240601081)

1. Justify how “SVB was liability sensitive outlier in a generally asset sensitive world”?

 Silicon Valley Bank was a liability-sensitive outlier in an asset-sensitive banking

market, contributing largely to its demise.
o SVB's capital is generally derived from large, uninsured deposits held by
technology startups and venture-backed enterprises. These deposits were
highly concentrated and vulnerable to economic fluctuations, rendering them
susceptible to fast withdrawal. Initially, these funds were low-cost since
companies kept cash in the bank during a low-interest period.
o Increased Sensitivity: Compared to diversified banks, SVB's lack of hedging
and dependence on concentrated deposits increased its liability sensitivity.
o Asset-Liability Mismatch: Rather of keeping liquid, short-term investments,
SVB made significant investments in long-term, fixed-rate securities. When
interest rates increased, the value of these securities fell, posing liquidity and
interest rate issues. Depositor withdrawals led SVB to sell assets at a loss,
deteriorating its financial situation.
o Liability Sensitivity: Rising interest rates help most banks by increasing loan
returns faster than funding costs. SVB, on the other hand, experienced the
reverse situation: its interest expenditures increased faster than its income,
putting severe strain on the company.

SVB's failure demonstrates the dangers of mismanaging interest rate exposure and
misaligning finance with investments. While most banks benefited from higher
interest rates, SVB's specific weaknesses made it an exception, resulting in its fast
collapse.

2. Explain what happened in the first week of March 2023 before the fall of SVB bank?

 Silicon Valley Bank underwent a precipitous drop in the week preceding the FDIC's
intervention on March 10, 2023, resulting in its failure. The crucial factors included:
 Liquidity Crisis: SVB experienced a substantial liquidity gap as a result of its
investment in long-term assets, which lost value when interest rates increased. To
fulfil withdrawal requests, the bank liquidated a large amount of its holdings at a
loss, aggravating its financial problems.
 Failed Cash Raise: In order to stabilize its balance sheet, SVB announced
intentions to raise cash. However, this action was seen unfavourably by investors
and depositors, resulting in a loss of trust in the bank's financial stability.
 Accelerated Bank Run: The combination of SVB's liquidity concerns and the
unsuccessful capital raise resulted in a rapid bank run. Depositors, notably those in
the technology industry with substantial, uninsured accounts, withdrew cash
quickly, depleting the bank's reserves.
 Regulatory Intervention: As SVB's condition deteriorated, the FDIC stepped in
on March 10, 2023, to safeguard depositors and ensure financial stability. The
bank was put into receivership, making it one of the most major bank collapses
since the 2008 financial crisis.
Levine's research highlights the quick chain of events and decisions that led to SVB's
demise, underlining the importance of depositor confidence and the difficulties banks
 confront when managing interest rate risks.

3. Explain the after-effects of SVB collapse in financial and regulatory world? How did
the SVB resolution work out?

 The collapse of Silicon Valley Bank in March 2023 triggered widespread regulatory
and industry responses aimed at addressing the fallout and preventing future crises:
 Legal Actions: Authorities, including the FDIC, considered pursuing legal action
against SVB's former leaders, citing mismanagement and "breaches of duty."
These actions aimed to hold executives accountable for their role in the bank’s
failure and recover losses incurred during its collapse.
 Re-evaluation of Liquidity Rules: The crisis prompted a review of global
liquidity standards. The Basel Committee on Banking Supervision acknowledged
shortcomings in Basel III norms, admitting they proved insufficient during the
2023 financial turmoil. This re-evaluation seeks to strengthen banking resilience
and improve regulatory oversight.
 Impact on Smaller Banks: SVB's failure also influenced how regulators
approached smaller institutions. In Australia, for instance, the Australian
Prudential Regulation Authority postponed significant regulatory changes after
lobbying efforts. This delay allows smaller banks to compete more effectively
with larger ones but reignited debates over regulatory fairness.
Levine emphasized that SVB's collapse served as a wake-up call for regulators
worldwide, prompting a critical reassessment of existing frameworks to bolster the
banking sector's stability and prevent similar crises in the future.

After the collapse of Silicon Valley Bank, the FDIC implemented several measures to
manage its assets and protect depositors:

 Bridge Bank Creation: SVB’s deposits and most assets were transferred to
Silicon Valley Bridge Bank, N.A., a temporary entity managed by the FDIC. This
ensured depositors had uninterrupted access to their funds and maintained banking
operations during the transition.
 Sale to First Citizens Bank: On March 26, 2023, First Citizens Bank acquired all
deposits and loans from the bridge bank, reopening SVB’s 17 branches under its
name the following day.
 Financial Arrangements: The FDIC secured equity appreciation rights in First
Citizens BancShares valued at up to $500 million. Additionally, the FDIC and
First Citizens agreed to share potential losses and recoveries on the loans
purchased, a standard practice to minimize risks in such acquisitions.
Potential Buyers:
Before finalizing the sale to First Citizens, the FDIC held an auction and considered
several bidders:
 PNC Financial Services opted out during the process.
 JPMorgan Chase, a major contender, likely withdrew due to regulatory and
market concentration concerns.
  Goldman Sachs was considered a less likely bidder due to potential conflicts of
interest.
 Private Equity Firms and other banks showed limited involvement.

4. Explain moral hazard dilemma faced after resolution of SVB bank?

 The settlement of Silicon Valley Bank (SVB) created a severe moral hazard quandary.
The explanation for the problem is:
 The government has decided to protect all depositors.
After SVB failed, the Federal Deposit Insurance Corporation (FDIC)
guaranteed all deposits, including those exceeding the $250,000 insured limit.
While this step alleviated worries of massive bank runs and increased system
stability, it also raised concerns about incentivizing riskier conduct.
 Potential consequences.
i. Depositors: By fully guaranteeing uninsured savings, the government
created a precedent that may dissuade depositors from investigating
banks' financial condition. Depositors may think that their funds are
safe regardless of where they bank.
ii. Banks: Smaller banks may take on more risks since they anticipate
comparable government assistance during crises. This lowers the
motivation to handle risks carefully.
 Balancing Stability and Accountability.
While securing the financial system was important to avoid panic, it generated
long-term questions about responsibility. To prevent future crises, regulators
must enhance monitoring and ensure that both banks and depositors act more
responsibly.

5. Justify with suitable examples why you would or would not buy SVB bank in March
2023?

 Buying Silicon Valley Bank in March 2023 would be similar to acquiring a struggling
English football team, with the choice based on important variables such as risk
tolerance, turnaround potential, and strategic fit.
o Reasons to Buy SVB: The "Newcastle United" Scenario.
When Newcastle United was bought by a Saudi-led consortium in 2021, it was
a failing club with poor financial performance but enormous untapped
potential owing to its large fan base and brand. Similarly, SVB may attract
purchasers for the following reasons:
i. Niche Expertise: SVB's focus on tech companies and venture capital
gave a unique customer base with long-term potential if handled
properly.
ii. Market Recovery Opportunity: Similar to Newcastle's capacity to
enhance performance via right investment, SVB may profit from
technological stability and strategic repositioning.
iii. Strategic Growth: A buyer with banking knowledge may improve
SVB's product offerings, just as new ownership reinvigorated
Newcastle via better management and investment.
 o Reasons to avoid SVB: The "Derby County" scenario.
Derby County was in financial problems, including administration, as a result
of bad management and unsustainable policies. Similarly, purchasing SVB
may be overly hazardous because:
i. Severe Asset Liability Mismatch: Similar to Derby's mishandling
of cash, SVB's poor asset-liability alignment proved costly to correct.
ii. Uncertain Market Conditions: The instability of the technology
industry may cause a sluggish and uncertain recovery.
iii. Regulatory Scrutiny: A buyer would face increased monitoring,
complicating operations.
Buying SVB makes sense only if the buyer has the means, patience, and strategy
alignment to conduct a challenging turnaround, similar to investing in a failing
football team with significant fundamental promise.

6. According to you, what are the main causes of collapse of SVB bank? Justify with
instances.

 According to Matt Levine, Silicon Valley Bank's (SVB) failure was caused by a
combination of bad judgments and external factors, which compounded to form a
perfect storm. The primary factors, reinforced by examples from his analysis are as
follows:
o Over-reliance on long-term investments: SVB made significant investments
in long-term bonds and mortgage-backed securities during periods of low
interest rates. This worked OK at first, but as interest rates climbed
significantly, these assets lost value. Levine noted that this left SVB with
assets worth substantially less than their initial acquisition price, resulting in
significant losses on paper.
o Risky client base: SVB's clientele were largely start-ups and venture-backed
companies. These firms, already cash-strapped owing to rising interest rates,
began withdrawing deposits to cover expenditures. Levine emphasized that
this put a significant strain on SVB's liquidity because it did not have enough
cash on hand to cover these withdrawals.
o Weak risk management: Instead of hedging against increasing interest rates,
which most banks do, SVB allowed their safeguards to expire in 2022 and did
not renew them. Levine characterized the decision as a cost-cutting
experiment that backfired when interest rates rose.
o Misjudged capital raising: When SVB revealed that it required $2.25 billion
to pay its losses, it sparked panic. Levine remarked that this decision, along
with allegations of financial difficulty, alarmed both investors and depositors,
resulting in a loss of confidence.
o Fast bank run: Levine reported how SVB's clients, many of whom held
substantial, uninsured accounts, withdrew $40 billion in a single day. This
quick outflow reduced the bank's reserves, prompting authorities to intervene.
In summary, Levine explained SVB's loss as a result of poor preparation and chance.
Its investments did not accommodate for rising interest rates, its depositor base was
very concentrated and reactive, and risk management was insufficient. Together, these
variables resulted in one of the most rapid and catastrophic bank collapses in memory.
7. How could SVB be saved? What could SVB, regulator, shareholders, borrowers or
depositors do that would have saved SVB’s failure?

 The collapse of Silicon Valley Bank (SVB) may have been averted with more
proactive efforts by its management, regulators, shareholders, borrowers, and
depositors. Each organization had the opportunity to reduce the risks that contributed
to the bank's failure.
o SVB could have managed risk more effectively by hedging against increasing
interest rates, diversifying its portfolio, and lowering its reliance on long-term
securities. Expanding its client base outside startups and IT enterprises would
have reduced the bank's vulnerability to concentrated withdrawals.
Furthermore, improved communication during the capital raising may have
avoided the panic that fuelled the bank run.
o Regulators may have interfered sooner, citing SVB's concentrated client base
and inadequate hedging methods. Regular stress testing, intended expressly for
institutions with the SVB profile, may have revealed its weaknesses. Early
regulatory efforts to improve SVB's capital foundation may have prevented
the issue from spiralling out of control.
o Shareholders may have taken a more active role by advocating for improved
governance and enhanced risk management. Supporting the capital raising
with additional cash may have restored depositor and investor trust.
o Borrowers and depositors also had a role. Borrowers might have kept their
deposits with SVB to provide liquidity throughout the crisis, whereas
depositors could have avoided panic withdrawals or diversified their accounts
to keep within FDIC-insured limits.
Finally, SVB's failure was due to poor risk management, insufficient monitoring, and
a breakdown in trust among its stakeholders. Coordinated measures by all
stakeholders may have avoided its demise.

8. Enumerate instances of risk-blindness in SVB collapse.

 The collapse of Silicon Valley Bank (SVB) resulted from numerous forms of risk-
blindness in crucial areas:
o Interest-Rate Risk: SVB made significant investments in long-term bonds
with fixed interest rates. When interest rates climbed, the value of these assets
fell dramatically, but the bank had not hedged against the risk. This lack of
foresight exposed SVB to severe losses.
o Liquidity Risk: SVB was unprepared for the liquidity crunch. Because
deposits were frequently withdrawn, it lacked sufficient liquid assets to fulfil
demand. The bank's emphasis on long-term investments rather than readily
available cash reserves exacerbated the problem.
o Governance and Operations Risk: SVB's leadership failed to address
significant risks, such as the requirement to renew interest rate hedges and
diversify its exposure. Weak risk management and a lack of control exposed
the bank to external shocks.
o Concentration Risk: SVB's clientele consisted mostly of startups and
technology companies, which are sensitive to economic shifts. When these
corporations began withdrawing enormous sums of money, SVB's liquidity
 rapidly depleted. The bank's failure to diversify its clientele left it exposed to a
sudden, collective withdrawal.
o Market Risk: SVB underestimated how fast the market would respond to
negative news. The news of its capital raising caused fear among investors and
depositors, demonstrating a misunderstanding of market psychology.
o Systemic Risk: SVB's bankruptcy might have had far-reaching consequences
for the financial system, particularly given the large number of uninsured
deposits. The bank failed to adequately analyse the systemic risk it presented
to other banks in similar circumstances.
In essence, SVB's failure was caused by a combination of underestimated risks in
areas such as interest rates, customer base concentration, and liquidity, which finally
led to its demise.