Ten Banking Lessons From Silicon Valley

What did the era of cheap money and relaxed regulations do to the business of banking? Answer: It injected lethargy and glamour into it! The banks forgot the basics of banking - risk management, balancing their assets and liabilities, and having cash needed to pay on demand!

- Srinath Sridharan

IT TOOK 40 YEARS to build what was the Silicon Valley Bank (SVB) – the darling of the tech world. It took just 40 hours of depositors’ distress signals to withdraw deposits prematurely, to bring it down to bankruptcy. What went wrong for a bank who was the darling of the startup ecosystem, and whose clients were half of the US’s venture-capital backed technologies and life sciences companies?

The business of well-run banks is simple – have a long term business model, with some short-term assets. Their assets and liquidity cover any liabilities that are due to mature. They get additional capital to cover business losses, and liquid assets to cover out-of-turn withdrawals. If all depositors were to withdraw their money at the same time, then the bank would not be able to meet those demands, causing a “bank run”.

So, here are ten lessons from the collapse of the Silicon Valley Bank:

Lesson 1: Bank-runs are possible, even in well-run banks. The Federal Reserve, the central banker of the US, hawkishly increased interest rates eight times in a year, to fight inflation. This reduced the value of assets held by the bank, and did not appropriately tally with its liabilities.

Lesson 2: Even money at near zero interest rate has a severe cost attached to it. Suddenly with the SVB experience, the US Fed focus is more on financial stability, than on inflation. Something that they can learn from the Reserve Bank of India (RBI), who juggles its multiple roles of inflation-manager, sovereign-debt manager and monetary regulator in charge of financial stability.