<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=228149342841576&amp;ev=PageView&amp;noscript=1">
Menu

LESSONS LEARNED FROM
THE COLLAPSE OF SILICON VALLEY BANK

The failure of Silicon Valley Bank (SVB) sent shockwaves throughout the financial world as the second largest bank failure in US history. Federal regulators took over the bank to ensure stability of financial systems and guarantee depositors their money. Following the collapse, Jeff Keltner, SVP of Business Development at Upstart, shares his thoughts on the potential cascading effects for the industry and lessons banks and credit unions can take away.

Jeff-Keltner-Headshot

JEFF KELTNER

Host of the Leaders in Lending Podcast

What are your key takeaways from the events surrounding Silicon Valley Bank this weekend?
“I think the first takeaway is that I’m impressed with the speed and scope of the federal government’s response. Stepping in to backstop all deposits (importantly not equity or bond holders) was critical to help stop this from becoming a broader run on other banks. That was an effective and speedy government intervention.”
What lessons should other banks take away from the challenges SVB faced?

“SVB really suffered from two distinct challenges. The first was a risk management failure in terms of the securities they were holding and the maturity and interest rate risk they represented. This was exacerbated by their being marked as hold-to-maturity and thus not marked to market. I think all institutions will be looking at their balance sheet and what sort of unrealized losses they might be forced to realize if they had a liquidity crunch.

The second issue was really the rapid withdrawal of deposits, to the tune of something like $40B+ in a day. It’s not totally clear what precipitated this, but the risk in the securities mentioned above along with poor communications and execution in the attempt to raise more equity dollars didn’t help. Here I think a key lesson is maintaining effective communications with customers. Having to say “remain calm” is likely to have the opposite effect.”

Do you think this was a one-off occurrence or are there longer-term trends to take away from this?

“While a substantial portion of this issue is situational, I think there is a longer term trend towards deposits being on the whole less sticky than they have been historically. I think that comes from a combination of it being much easier for people to move money now with lots of digital interfaces. I also think that we have seen more deposits seeking higher yield offerings as interest rates have risen so quickly. I think that is likely to drive up the cost of funds for banks over time, in addition to likely reducing the stickiness of deposits overall.”

How should banks think about responding to those more permanent changes?
"I think those changes will make it riskier for banks to utilize longer-duration debts that are subject to interest rate risk. The possibility of needing liquidity more rapidly will make those options on the whole riskier. It also means that loan portfolios may need to produce a higher yield to offset the higher cost of funds. Over the medium term, I think that will push financial institutions to focus more on shorter duration, higher yielding loan products like consumer loans."
Do you think there will be any changes to the regulatory environment as a result of this?
“I’m not a Washington watcher, but speaking broadly, banks as large as SVB had previously been subjected to a tougher regulatory regime after the financial crisis, so there is going to be a discussion of bringing back those heightened standards. The Federal Reserve has also launched an investigation to look at its supervision over SVB and what might have been missed by supervisors - that's really going to be a key factor in what comes next.”

Leaders in Lending Podcast

Upstart launched the Leaders in Lending podcast in 2021. The podcast looks at AI lending in the consumer credit and lending space and the impact of digital transformation on consumers and institutions. This is a show for lending professionals who want to grow their consumer lending programs and improve their consumer experiences. This is why we bring on leaders in the lending industry to share their insights, interesting perspectives, and provide some actionable ideas for other leaders in the industry to take advantage of.

Listen Now