Silicon Valley Bank Collapse and Operational Resilience

The Failure of Silicon Valley Bank

The California-headquartered Silicon Valley Bank, known for helping founders, innovators and start-up companies get started in growing a business has recently failed on March 10th 2023 following a number of hapless investment decisions.

U.S. regulators have shut down the bank, in what is the country’s second-largest failure in banking.

The bank was popular with tech start-ups, and had built its entire business and services on supporting these start-ups, including organisations based as far away as China.

Many of these companies used Silicon Valley Bank to handle their business expenses, which as a result, lead to a series of deposits. The organisation then invested the majority of these deposits, focussing on long-dated US government bonds.

However, as is well-known in the industry, interest rates rise and bond prices decline. This meant that when the Federal Reserve raised rates to tackle inflation, the bank’s bond portfolio began losing value. As economic conditions worsened, tech companies in particular were affected and customers started to draw back deposits. 

Silicon Valley Bank then started to sell bonds at big losses. In the 48 hours following them announcing their sale of the assets, the bank completely collapsed.

So what does this mean for start-up companies?

As a result of the bank's failure, billions of dollars in funds were either frozen or lost whilst the government transitioned to take over the bank, this disrupted the entire tech industry's financial system. A string of start-up companies that have their cash in Silicon Valley Bank, were worried how they were going to pay their staff and service customers.

If money is frozen or lost, start-up founders would need to consider laying off workers. Furthermore, larger companies would need to warn investors of the cash deposited with Silicon Valley Bank. Since the collapse, venture investors have also cancelled meetings with start-ups, which in turn could have a knock-on effect of how quickly they will be able to continue business.

If customers of current start-ups are bigger firms reliant on the services and products of the company, it calls into question the how strong their operational resilience is and how often it is reviewed.

Is This the ‘Call to Action’ Firms Need For Operational Resilience and Stress Testing?

Operational resilience is defined by the FCA as 'the ability of firms, financial market infrastructures and the financial sector as a whole to prevent, adapt and respond to, recover and learn from operational disruption.'

www.fca.org.uk

Operational resilience

Read about the importance of operational resilience and the requirements for firms.

Operational resilience for supply chain is good business practice and managing operational resilience is a dynamic activity that sees continuous tightening of key risks and assessment against acceptable tolerances.

The five major steps of building operational resilience are identifying important business services, mapping these services to resources, setting impact tolerances for acceptable levels of disruption, creating scenario stress test conditions and undertaking self-assessment and improvement.

Stress testing is vital to work out if a start-up can continue delivering their important business services within impact tolerance limits through severe enough scenarios, such as the collapse of a major bank like SVB.

There is also a global requirement that firms should become operationally resilient, and the US, EU and UK regulators all require firms to adhere to an Operational Resilience establishment timetable.

However, firms should have by now, already identified important business services that could become harmful and cause risks if disrupted. As well as set impact tolerances for these services and carried out the relevant mapping and testing. Firms should have identified, prioritised, and invested in the ability to respond and recover from potential disruptions, developed their own internal and external communications plans and prepared relevant self-assessment documentation.

This means that if start-ups had already turned their focus to operational resilience, their recovery from this disaster should have already been stress tested in a similar scenario leading to a clearer plan and focus on a quicker recovery.

In the days following the collapse, CEO's of start-ups explained that if funds do not reach their employees soon, they would have to find a way to pay thousands of employees manually in the US and Canada. Without operational resilience, they do not have the infrastructure for this. Start-up companies with 10 to 100 employees, who fail to make payroll, would also have to furlough or completely shut down workers if private capital cannot provide a solution.

Although there is a global requirement to become operationally resilient, this is not enough. Silicon Valley Bank collapsed due to worsening economic conditions, which suggests tightening up your supply chain/ 3rd party operational resilience doesn't just tick the regulatory box; it makes business sense, as the global economy teeters on the brink of a recession.

Post originally published 13th March 2023