On March 9th, 2023, SVB Bank, one of the largest banks in the United States, declared bankruptcy, sending shockwaves through the financial industry and leaving many of its customers in a state of uncertainty and fear.
SVB Bank, formally known as Silicon Valley Bank, was established in 1983 with the aim of providing financial services to the technology and life science industries. Over the years, the bank had grown to become one of the most prominent banks in Silicon Valley, providing banking services to startups, venture capitalists, and high-net-worth individuals. SVB has locations in nine countries and fifteen states in the United States.
The cause of the bank’s failure is attributed to a combination of factors, including mismanagement, over-reliance on the technology industry causing customer concentration, and an inability to adapt to the changing regulatory environment. Specifically, the feds increased the prime interest rate to manage inflation; which cause federal bonds to be increasingly discounted meaning worth less. Unfortunately, SVB’s debt portfolio had a disproportional allocation in this debt.
SVB Bank had been under scrutiny by regulators for its lax approach to risk management, and its failure to adequately address these concerns ultimately led to its downfall. The bank’s failure is also likely to lead to increased scrutiny of other banks, as regulators seek to prevent similar failures from occurring in the future.
As of writing this article, the FDIC created the Silicon Valley Bridge Bank to secure all deposits. As of Monday, March 13, 2023, depositors may conduct business as normal. Stock shareholders and unsecured lenders to the bank are not protected by the Bridge Bank.
If You Bank at SVB
Fortunately, we did not have any clients impacted by SVB’s failure. If you bank at SVB, we are happy to help you. We will:
- Keep You Informed. The first step is to keep informed about the situation.
- Make Sure that Payroll Goes Out Based on your unique situation keep all your payees informed and get them paid on time if not already missed.
- Explore Alternative Banking Options. As Growth CFOs, we help by researching and recommending other banks that are suitable for your needs. We can also provide assistance with transferring your accounts to a new bank and help navigate the process.
Is Your Bank Healthy?
Review your bank and banking relationship.
Deposits Greater than $250,000 per institution are not insured by the FDIC. As a result, each dollar above this threshold is at risk. Notice, that I said per institution not per bank account because spreading balances out across multiple bank accounts at the same institution doesn’t provide any benefit.
Check Your Banks Rating. The FDIC publishes the grades for each bank. The grades are based on the CAMELS assessment framework, which evaluates six aspects of a financial institution’s performance. Ratings of 1 or 2 indicate strong financial institutions, while ratings of 3, 4, or 5 indicate problems or weaknesses.
Assess the Pros and Cons of Implementing a Risk Strategy. For example, transferring surplus funds into investments or different banking institutions may be worth considering. Plus, you may want to have a second bank that is ready to go or performing services for you such as payment receipt and processing. This is similar to what COVID-19 taught the supply chain world. Depending on one bank may cause your business to stall.
What Does the “SVB” Bank Failure Teach Business Owners About Risk?
Learn from SVB’s failure to be even more effective.
Develop the Ten Performance Drivers. Based on John Warrillow’s research into 34,000 private companies, there are eight drivers proven to make your business 71% more valuable than the average competitor. These drivers are dependencies, like SVB’s industry/customer concentration. They include customer concentration, supplier dependence, the owner’s trap, financial performance, growth potential, key person dependence, positive cash flow, recurring revenue, uniqueness, and customer satisfaction.
Habit 1 – Achieve Positive Cash Flow. This includes the 12-week cash forecast to ensure that the timing of cash flow in is greater than the timing of cash flow out and measuring the velocity of money to determine practices and the terms of doing business.
Habit 2 – Use the Monthly Financials Like a Scoreboard. Teach the P&L managers to know their number story. This includes gaining clarity based on variances to figure out what to do next.
Habit 3 – Engineer Profit with the Budget. Run what-if scenarios from sales to pricing strategy and compensation plans. Figure out the breaking points and how to optimize the financial outcomes that you are looking for. Gain clarity and confidence.
Measure Your Risk. Just like the banks, measure your financial and non-financial risk. Competitive benchmarks are ideal tools to assess your business health.
In conclusion, the SVB Bank failure is a significant event that has impacted many banking customers, while proactively teaching willing business owners about risk.
Since solutions are never cookie-cutter, if you want our help increasing effectiveness, please Schedule a 25 Minute Discovery Call.