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UMD Banking Expert Recommends Measures to Mitigate ‘Contagion Threat’ of Bank Collapse
AP Photo/ Benjamin Fanjoy
The U.S. economy reacted in shock when a run on deposits brought down Silicon Valley Bank last week, but there were troubling signs of the institution’s approach to risk well before the crisis, according to a new essay by a University of Maryland expert in banking risk.
Over-concentration in a volatile sector, poor investment strategy, and faulty risk management practices and board risk oversight ultimately doomed the institution to the second-biggest bank failure in U.S. history, argued Clifford Rossi, executive-in-residence and professor of the practice at the Robert H. Smith School of Business. Writing in Insurance Journal, the former managing director and chief risk officer for Citigroup’s Consumer Lending Group said that how the FDIC and other regulators react could have far-reaching consequences for the entire banking system.
As someone who had a front-row seat at the largest bank failure in U.S. history, Washington Mutual, the demise of Silicon Valley Bank (SVB) brings back memories of how seemingly well-run banks can in an instant run into trouble due to unexpected events that catch these firms off-guard. As in the case of Washington Mutual, poor governance and management of key risks sealed SVB’s fate.
Although the business models for SVB and WaMu were very different—SVB catered to the venture capital crowd and tech companies, and WaMu largely focused on the home loan business—they both were far too concentrated in one sector. SVB probably never imagined it could experience a run of $42 billion in a single day, accounting for about one-quarter of all deposits at the bank. So, what happened to cause SVB to be abruptly taken over by the FDIC?
Read the rest in Insurance Journal.
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