One of the most interesting discussions held so far with many opinions and examples and exchanges. The overriding points of interest were:
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Just poor management. This came over multiple times from multiple people and provided insight into the need for a more transparent or “Loyal opposition” challenge mechanism. In regard to SVB one point raised was “complete lack of management” which again raises questions concerning the hiring and boards role in ensuring that management The need for more rules or governance was questioned as the fact that the existing levels of control should be sufficient but if people don’t following this guidance then all the rules we can think of wont help. A key question which needs to be continuously asked is is management “fit for purpose?”
o Weak signals to be aware of in this regard are – too much self confidence by bank management
o Using none traditional tools to bolster margins In a bank or financial institution, prudent risk management will normally try to distribute the risk to manage exposure to inflation of other return risk, attempting a more effective balance between return risk and inflation risk.
While a number of banks have been trying to improve stability there are still some who push growth at all costs and appear to be framing risk management in a way that does not enable the risk management function to act as desired by stakeholders. Acting as bellwether or loyal opposition and the challenging approach to certain decisions is not wished for. Risk management need to ensure scope, roll and responsibility and support from boards are all adequately described and supported.
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The questions concerning Credit Suisse which occurred in a simpler time to the SVB highlights the issues of risk aggregation and the need to be aware of such events. The graphic below shows the growing use of funds for SME’s but being supported by growing push for margin.
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The fact that such banks, which support venture capitalists, are able to pressurise clients by asking, and only providing credit, if “all other banking activities are conducted in this single supplier model” also raises questions about the business model in use. Effective risk management will normally try to distribute the risk whereas in this example the banks specifically ask clients to aggregate and consolidate risk would appear to be not in the customers own interest. Regulation authorities need to watch this carefully.
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Regulator activity does seems to have stabilized the system in both the SVB and CS examples, but by “playing God” which stakeholders get bailed out vs not (e.g. going beyond insurance limit for SVB as bank was crucial in one sector of the family, interference with understood pecking order among classes of bondholders and shareholders in the case of CS). Illustrates that “appropriate” (or at least “effective”) RM varies based on what are the overriding objectives and stakeholders
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While the regulators appear to have stabilised the situation, in doing so they may have introduced even more "moral hazard" to an environment which has become more risk taking due to the roll-back of post-GFC financial regulation.
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Grouping the various points above we see three interesting trends
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o moral hazard risk needs to be considered, assessed by risk managements and reported upwards
o extreme scenarios need to find acceptance by decision makers and built into their business models
o ad hoc broadening of the criteria of what constitutes systemically important, e.g. likely concern about keeping CS in Swiss hands, risk to start-up sector and risk of contagion to regional banks and real estate in case of SVB
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