What Comes Next in Policy & Risk Management for Your Organization

SVB Collapse: What Happened?

Since 1983, Silicon Valley Bank provided banking services to tech firms, funding early-stage startups and venture capital that conventional lenders wouldn’t take up. SVB was a banker to nearly half of the United States’ venture-backed technology and healthcare companies that went public over the past two years.

On Friday, the Federal Deposit Insurance Corporation (FDIC) took over SVB after a bank run prompted by its effort to offload reserve assets and a plummet in the stock price. The collapse of SVB is the most prominent corporate casualty of the U.S. Federal Reserve’s policy of raising interest rates to reduce inflation, according to FiscalNote’s Oxford Analytica analysts.

As interest rates rose and venture capital became more difficult to find, some tech startups were already withdrawing deposited funds to provide working capital. FiscalNote’s Predata, a global risk intelligence platform that monitors online attention, observed that English-speaking desktop users researching SVB spiked multiple times throughout January, hitting a one-year high on March 3 and again on March 6 and 7, indicating increasing concern with SVB.

Throughout January, research into SVB occurred at almost the exact same time as research into the FDIC, this likely indicates that people concerned with SVB were concerned that the scenario would escalate to require FDIC involvement.

At this point, analysts say there is no suspicion of fraud, lax lending practices, or unreasonable risk-taking by the bank’s management.

Possible Repercussions in Regulatory and Risk Management

SVB’s collapse is unlikely to indicate systemic risk to the broader banking system, according to Oxford Analytica, but given the incestuous nature of the Silicon Valley and tech ecosystem, analysts expect some level of spread within the industry.

However, looking at the regulatory landscape, Oxford Analytica warns “banks with large bond holdings will face investor scrutiny for mismatches between their funding costs and the rates earned on their assets.”

Analysts also expect a pause in the U.S. Federal Reserve’s interest rate hikes, and that startup companies and venture capitalists will face increased challenges to secure capital. Rep. Maxine Waters, D-Calif. and the ranking member of the House Financial Services Committee, has already said they will be reevaluating regulations in the financial sector.

“There are more things that need to be looked at, but I think we’re definitely going to see additional lending regulations,” says Michael Fenner, associate consultant at FiscalNote Professional Services, a team of policy experts dedicated to analyzing U.S. and global policy.

An example is the business practices of SVB and other similar lending institutions. “A lot of these businesses were not necessarily forced into staying with SVB but SVB made it highly within their interest to bank with them because they would give favorable personal loans and mortgages to the CEOs and the CEOs of those startups,” Fenner says. “You’ll see that it will probably very quickly become a legislative and regulatory issue.”

There will also be more eyes on the FDIC and, specifically, on the $250,000 insurance per individual per account and how that will be covered in the SVB and Signature Bank case.

On March 12, the U.S. Federal Reserve announced emergency measures to backstop banks facing short-term liquidity pressures, to avoid more bank runs that would overwhelm financial institutions. Federal banking regulators said they would protect all Silicon Valley Bank depositors, including those above the $250,000 deposit insurance limit provided by the Federal Deposit Insurance Corporation (FDIC).

“Depositors will have access to all of their money starting Monday, March 13,” the FDIC, Federal Reserve, and Treasury Department said in a joint statement. “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

The FDIC would do this through its “emergency fund” built from user fees and charges during regular transactions. “The idea behind the $250,000 is to sell off the existing assets they [SVB] have and that’s where it would come from. And the deposit assessment fees are this emergency fund, which is concerning,” says Fenner as he explains how this emergency fund would be used to complement the $250,000.

Be Proactive — No Matter What Happens Next

While the future for financial institutions and the economy is uncertain in the immediate aftermath and concerns about contagion loom, there are things you can do to mitigate risk and stay on top of what’s going on. Here are some ways to do that.

While there haven’t yet been new bills or regulations introduced in the wake of these bank failures, they may be on the horizon. If new regulations and legislation or changes to existing policy could impact you, it’s crucial that you are ahead of them and can respond early to achieve the best outcome for your organization.

“Definitely monitor the banking committees [in Congress] because they’re going to be in full swing right now — you’ll see some subpoenas and hearings from these committees,” Fenner says. Getting all these committees and hearings transcripts

Risk Management

 as quickly as possible and being able to receive alerts when your organization or a relevant topic is mentioned will be a must as things progress. “That’s where a lot of the information is going to come out of,” Fenner adds. “We’re in the very early days of this and we don’t know how that’s going to trickle down but this could be much, much larger.”

For the Credit Union National Association (CUNA), the team is definitely keeping a close eye on any Congressional hearings that might come out of this and working closely with legislators to make sure there aren’t any unintended consequences for credit unions coming out of broad legislative activity, like in 2021 with the Build Back Better Act (BBBA).

“The best thing we can do organizationally is focus attention on our credit union differences and our positive impact on consumer financial security, closely follow any legislation that may come out of this situation, and ensure there are no unintended consequences that could negatively impact credit unions. We work with lawmakers to ensure our differences are encapsulated in legislation,” says CUNA’s Deputy Chief Advocacy Officer, Federal Government Affairs, Jason Stverak.

Federal financial regulator monitoring is also essential to mitigate further financial risk and stay on top of regulator activity so there are no surprises for you or your organization. Tracking federal and state legislation and regulations is critical to gauge the priorities, decisions, and future concerns of financial agencies. But monitoring all this activity across statehouses, Congress, and multiple federal agencies is time-consuming and difficult to do efficiently. Leveraging FiscalNote’s monitoring software and human-led policy analysis means you’ll never miss a thing and can jump straight to strategically planning your next steps.