Page 34 - CCFA Journal - 11th Issue

金融监管 Regulation 加中金融
A Preliminary Review of SVB default and Potential Impact on Regulation and Risk Management

浅论硅谷银行倒闭给金融监管和风险管理带来的冲击

Eugene Yuqing Wang 王宇清

In the paper, the default of Silicon Valley Bank (SVB) is reviewed based on the information revealed so far, especially in relation to
portfolio, risk, and capital management. We focused on interest rate and liquidity risk management; available-for-sale (AFS) and
held-to-maturity (HTM) at SVB and both the portfolio management and the risk management of mortgage-backed-securities
(MBS); and funding risk management. As a result of SVB and other US region banks’ default, a major overhaul of the regulation
framework for the large US region banks is expected; and the US regional banks will also need to build up a “modern” and robust
business and risk management framework and infrastructure.

在本文中，我们根据迄今为止披露的信息，特别是与投资组合、风险和资本管理相关的信息，对硅谷银行（SVB）的破产
进行了分析。 我们重点讨论利率和流动性风险管理； SVB 的 (AFS) 和 (HTM) 以及房地产抵押贷款证券 (MBS) 的风险管理；
和资金风险管理。 我们预计美国大型地区银行的监管框架预计将进行重大改革，同时美国地区银行系统需要建立“现代”
且稳健的业务和风险管理框架和相关基础设施。

1. Introduction

The failure of Silicon Valley Bank (SVB) in March 2023 has sent ripples through the global banking industry. Its collapse is the
second largest failure in US banking history and the largest one since the 2008 financial crisis. As of the end of 2022, SVB had USD
209Bn in assets, 175Bn in deposits, and a market cap of 13.6Bn [1].

The default of SVB is featured by the fastest and one of the largest bank runs in the US History. On March 8, 2023, the bank was
forced to raise additional cash by selling securities in its AFS portfolio at a $1.8 billion loss. Then a panic induced by the venture
capital community and fanned by the social media, depositors tried to withdraw $42 billion in a single day. On the evening of
March 9 and into the morning of March 10, SVB communicated to supervisors that the bank expected an additional over $100
billion in outflows during the day on March 10. The next morning, the bank collapsed, and federal regulators took control.

The collapse of SVB has caught both the industry and regulators by surprise. Due to the embedded leverage feature, no bank
would survive a bank run at this scale. US Treasury, Fed, and FDIC believed that it was be an isolated incident and moved quickly
to seize the bank, with the claim that “The U.S. banking system remains resilient and on a solid foundation, in large part due to
reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms
combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings
remain safe.” [2]

However, what have revealed by the investigation of the SVB default case from various sources and what happened to the US
regional banks following the default revealed more problems in the US financial system, especially the US regional banks. Figure 1
shows the US regional bank index change this year and it can be seen that, even though SVB is somehow unique due to its client
base and business model, the US regional banks have been facing similar challenges.

The SVB default happened under a very volatile macroeconomic environment from 2020 to 2023 with major factors being: The
deposits of the U.S. banks grew, due to various factors, including paycheck Protection Program loans and Government stimulus
checks, a booming IT sector because of remote work; FED started to raise interest rate in March 2022 to fight inflation to 5%, at
the fastest pace in 40 years; Mortgage market, especially the commercial mortgage market, was adversely impacted by both
working from home and high interest rates.

SVB (and many US regional banks) has faced challenges to manage through this volatile environment. They have been relying on
cheap funding such as deposits and light in the regulatory capital (due to loosen regulation); They lack a robust risk management
framework and business management tools and infrastructure that a modern bank needs to manage funding and liquidity. Taking
SVB as an example, we showed how these factors have contributed to its demise in Section 2.

CCFA JOURNAL OF FINANCE July 2023
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