SBV collapse and the importance of Treasury Management

Negative tech trends meant many SBV customers started withdrawing funds to meet their financial obligations (the bank’s business was heavily catered towards US tech startups). This in turn, forced SBV to sell their bonds at significant losses so that they could meet the cash demands of these withdrawals. Depositors became spooked and embarked on a 48-hour withdrawal frenzy that ultimately led to the bank’s demise.

James Angel, an expert on market structure and global financial market regulation said to Al Jazeera:

“SVB collapsed because of a stupid rookie mistake with their interest-rate-risk management. They invested short-term deposits into long-term bonds. When interest rates rose, the value of the bonds fell, wiping out the equity of the bank.”

Campbell R Harvey, a professor at Duke University’s Fuqua School of Business, said that SVB’s woes were a lesson in the need for banks to diversify their assets. “Your loan book needs to be diversified,” Harvey added. “It’s not obvious that this bank actually did this.”

The fallout of SBV’s failure has been significant. Two days after its collapse, US regulators seized the assets of Signature Bank, a New York-based lender known for its business with the cryptocurrency sector, marking the third-largest bank failure in US history. Bank shares have dipped sharply amid fears of contagion across the financial sector. First Republic Bank, a mid-tier bank based in San Francisco, California, saw its stock price plunge as much as 60 percent. Bank shares in Europe and Asia have also taken a significant hit. In the United Kingdom, financial authorities announced they had facilitated the sale of SVB’s local unit to HSBC, Europe’s biggest bank, in order to safeguard 6.7 billion pounds ($8.1bn) in deposits. Canadian regulators announced they had taken control of the country’s SVB unit, while Germany’s Federal Financial Supervisory Authority said it had provisionally closed the local branch of the lender.

Although SVB’s customers ultimately had their deposits guaranteed, the full effect of the lender’s implosion on the startup scene may not be apparent for some time.

“Fortunately, the increased capital requirements imposed after the 2008 crisis seem to be paying off,”

Angel said.

“Banks are now required to have much more capital than before, making them much less risky. Even the banks that have made stupid mistakes mostly lose their own money and not that of depositors.”

That said, anyone thinking the crisis is over missed the lesson completely.

The learning opportunities for corporate boards and treasury management to name a few are:

• A critical need for business continuity in case cash, liquidity and payments are unavailable.
• CFOs & Treasurers require real-time visibility for liquidity planning; end of day visibility is no longer sufficient.
• Companies must reduce vulnerability to rising interest rates and FX volatility.
• CFOs need control of bank counterparty exposure limits.

Business Continuity When Cash Is Unavailable – As the news about SVB unfolded, Clients of Kyriba believed that their company’s cash, liquidity and payment channels were in jeopardy and they needed to scramble to find new alternatives to operate that day—and maybe for longer. They used Kyriba to gain real-time visibility into their cash balances at SVB and in turn initiated instant payment runs to ensure that critical disbursements could be executed, funding their accounts at other banking providers and completing supplier payments without disruption. As one client stated,

“On-demand visibility into our cash at SVB coupled with the ability to mobilise our cash immediately allowed us to avoid a liquidity disaster”.

This highlights how critical it is for CFOs to have business continuity for the possibility that cash is unavailable.

CFOs Require Real-time Liquidity Planning – As reported in Fortune, $42 billion was withdrawn from SVB on March 10 alone, driven by mobile and digital banking technology. Not only was the phone to blame for the speed of the unprecedented bank run, but social media further accelerated the contagion, adding a new layer of hysteria for panicked account holders.

CFOs without real-time visibility into cash and automated real-time payment capabilities built into their treasury and payments platforms became like deer in headlights, unable to catch up to those with on-demand visibility and actionability.

The challenge for most finance teams, however, is that the data, insight and actionability of their platforms is disaggregated. They have multiple software packages with varying levels of integration—and none with the unifying ability to see, protect and move cash in an instant.

CFOs need to forecast cash and liquidity with multiple scenarios to give the board and shareholders strategic options should the base scenario not materialise, and one of many unfavourable scenarios is instead right around the corner. And this must be done at machine speed, so that the CEO is always in control of the organisation’s cash and able to react to anything, at any time.

Reduce Vulnerability to Rising Rates and FX Volatility – Unprepared for a higher interest rate environment – including paying out higher rates than they were earning in return – SVB was highly vulnerable to rising rates.

Volatility—interest rates, currency markets and in some cases commodity prices—needs to be mitigated so that corporate earnings are a function of their business and are not unduly influenced by the market rates that continue to shock up and down like an out-of-control roller coaster.

CFOs must understand and quantify the exposures of market rates on their balance sheets, income statements and cash flows. Then at the board level, organisations can decide on the appropriate risk tolerance to ensure that investment, borrowing and hedging policies are working in the best interests of the company’s financial health.

Sadly, those CFOs who are not well supported by their treasury management systems and ERP software have incomplete insight and inconsistent data to make real-time liquidity management and risk management impossible to achieve. CFOs need a liquidity platform that supports their real-time data strategy.

Control of Bank Counterparty Exposure Limits – CFOs who set up real-time control and enforcement of bank counterparty exposure limits saw this meltdown coming—even if only a few days or weeks ahead of others.

An effective bank exposure strategy delivers a cash exposure limit report on demand and in real time so that risk factors such as a bank’s capitalization and the absolute value of the firm’s liquidity exposures can be constantly updated to identify potential issues and notify of limit breaches. As a standard report in your treasury software’s library, exposure limit reporting empowers treasury teams to rebalance cash, investments and borrowing decisions to meet corporate risk directives.

Going forward, boards of directors will now require a much more thorough process to enforce, control, and prove continuous enforcement of these limits and actions. With the right platform and data, CFOs can prove that cash and investments are respecting the board’s counterparty risk compliance and limits.

The SVB challenges confirmed the need to automate liquidity planning, risk management and cash forecasting to improve financial resilience—to everything from bank failures to the consequent market volatility. For every CFO that could not offer immediate, real-time answers to the direct and indirect impacts of SVB on their balance sheets, income statements and cash flow, this is a wakeup call to realign your data, platforms and processes to ensure liquidity is actionable for every risk scenario that can possibly occur.

Sources:

• SA Financial Journal Weekly Wrap: Global banking sector in hot water
• Eurobase: SVB Bank Collapse: The Importance of Effective Treasury Management
• Kyriba: The Four Reasons SVB is a Wake-Up Call to Automate Treasury
• Kyriba: SVB: A Warning of Financial Resilience