Lessons from the Silicon Valley Bank Collapse

The collapse of Silicon Valley Bank in 2023 highlighted the intertwined nature of multiple risk factors.

The most critical element of the SVB case is to understand the mechanisms between the risks, and to highlight that it is not all due to unpredictable perfect storms. There are precise relationships that have also been observed in the past (e.g. the savings and loan association crisis), which were driven by partly similar factors and had dictated the revision of some rules, especially on maturity mismatch.

In the history of regulation, crises are often followed by a process of regulatory innovation and, following their effectiveness, by a debate that leads to their weakening. This is without taking into account that the absence of significant defaults may depend precisely on the effectiveness of these rules. This was the case with the interventions on the interest rate risk in the banking book and on the liquidity ratio prior to the financial crisis of 2008. Then the liquidity coverage ratio and the net stable funding ratio were introduced with Basel III.

But what is still lacking is an understanding of the risk network. How one risk can generate or intensify another, or worse, several others, as in the case of SVB.

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