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Dhavarajh Frank 5 min read

SVB Bank Collapse: The Importance of Effective Treasury Management

The collapse of SVB Bank has sent shockwaves through the financial world and the tech industry with many questioning how such a failure could have occurred, especially since the increased regulations and controls post-2008. While there were undoubtedly a number of factors at play, one key area of concern was the bank's treasury management practices.

Treasury management refers to the processes and procedures used by banks and other financial institutions to manage their cash and other assets. This includes everything from forecasting cash flows and managing liquidity to investing excess funds and mitigating financial risk. Effective treasury management is essential for any bank, as it helps to ensure that the institution can meet its financial obligations and maintain the confidence of its stakeholders, the most critical one for a bank being its depositors. 

Unfortunately, it appears that SVB Bank's treasury management practices were lacking.  The bank is said to have failed to adequately hedge interest rate risk in the banking book, an issue that should never have occurred.  Bankers have been managing this risk way before regulators really cared. The resulting losses scared their depositors and as their deposit base was already concentrated (mainly consisting of fintech start-ups and early-stage firms), the ‘herd’ moved quickly, leading to a severe cash crunch when customers began withdrawing their deposits en masse. 

Perhaps most concerning of all, however, is the allegation that SVB senior management was aware of these issues but failed to take action. According to some reports, the bank's executives were warned about the risks associated with their investments and liquidity management practices but chose to ignore these warnings. Bank treasury departments and the governing ALCO must be aware of interest rate risks to the balance sheet even when we’ve had over a decade of low-interest rates. Complacency around managing balance sheet risks has no place in deposit-taking institutions.   

The consequences of these failures have been catastrophic. SVB Bank will be ‘bailed out’ (although no one will use that phrase) it seems in the US and in the UK HSBC has agreed to buy the UK bank.  No doubt similar transactions will take place globally.  The collapse has also had wider implications for the financial sector, as it has raised concerns about the adequacy of regulatory oversight and the potential for similar failures to occur in other institutions, yet again.  Intense scrutiny (qualified and unqualified) of other banks will be taking place as a result of SVB and we hope that any contagion risks are mitigated as a result of key interventions. 

In response to these concerns, industry experts are once again calling for greater scrutiny of banks' treasury management practices. This may include the implementation of stricter regulations around the types of investments that banks are permitted to make, as well as increased oversight of liquidity management and risk mitigation strategies. 

Ultimately, the failure of SVB Bank serves as a stark reminder of the importance of effective treasury management in the financial sector. Banks and other financial institutions must be vigilant in their management of cash and other assets, and must prioritise the long-term health of their institutions. Failure to do so can have catastrophic consequences not just for individual banks but for the wider financial system as a whole. 


Footnote: This article has been written by our experts and is based on their interpretation of events from information freely available in the media and public domain.

Schadenfreude will no doubt be evident within all of the media coverage surrounding SVB BUT it is very sad that the thousands of no doubt good, well-intentioned, talented people will now be looking for a new employer. The vast majority of them will have had no influence over the treasury management decisions in SVB. SVB has been a key supporter of innovation and start-ups globally and it is with deep sadness that we have to bid farewell to SVB. The longer-term impact of this in the tech sector remains to be seen and we can only hope that the positive impacts SVB had on the start-up ecosystem globally, will continue.