Adeoye: What Nigerian Banks should Learn from Collapse of Silicon Valley Bank

Amidst the fear that the closure of the United States-based Silicon Valley Bank, the bank of choice for many venture capitalists and startups, may affect Nigerian banks and startups, Executive Director, Operations/Chief Rating Officer, DataPro Limited, Mr. Oladele Adeoye, in this interview with Festus Akanbi discusses issues that precipitated the fall of SVB and lessons for Nigerian banks

What lessons do you think Nigerian banks can learn from the collapse of the American bank, the Silicon Valley Bank?

The first lesson should be that our banks should develop the capacity to have a practical understanding of the behavioural pattern of their market of operation. It does not matter whether you intend to play big in the retail, wholesale, or agricultural sector. You must develop the capacity to see through the lens of time to know when the party is over in a sector and cut down on your losses. There must be a deliberate action plan to pull the plug when you discover that your bank is highly exposed to a particular sector. On the fund supply side, banks must be deliberate to diversify their risk in the event of excessive exposure to a particular sector. The Central Bank of Nigeria has a guideline on the single obligor limit as well as Bank’s maximum exposure to connected persons and sectors. Banks should learn also not to breach this to avoid a repeat of the financial tsunami of 2010 and the sort of collapse that befall SVB.

What, in your opinion, is the most significant issue that led to the collapse of SVB?

There is a need for us to look into the facts of the SVB profile from information gathered from the public domain. The bank was a niche player catering to the financial needs of tech-based start-up companies. These companies formed the buck of their deposits and loans.

At the peak of the Covid-19 pandemic, the US Fed reduced interest rates to near zero per cent to stimulate the economy. This essentially led to increased borrowing and by extension inflation. The bonds issued then were also at near zero per cent interest rates.

The period under reference was the boom period for SVB given that deposits recorded from its primary market, technology, and venture capital tripled at that time. Therefore, the bank put its excess fund into the long termed near zero interest bond issued by the government.

To tame inflation, the government began to raise interest rates upon which new bonds were issued. The implication of this was that the value of the earlier bonds bought with depositors’ funds by the bank began to fall. Unfortunately, the cost of funds began to rise for everyone including the customers of the bank. This is in addition to the venture capital investors becoming edgy on account of the voluntary wound-down announced by Crypto-focused bank, Silvergate Capital Corporation at the about same time. These factors necessitated depositors to start calling for the withdrawal of funds. The bank could not raise its planned additional capital of $2billion which would have helped to enhance its liquidity.  Therefore, the bank was pressed to sell off its investment at a loss of $1.8b to meet depositors’ needs.

The regulatory filing of that loss on the 8th of March 2023 by the bank was viewed by its banking public as a sign of insolvency. This led to panic withdrawal as everyone who had deposits above US permitted insured limit of $250,000 called for their money.

I have read commentaries on the reason for the collapse. However, in my opinion, the major cause of that collapse was concentration risk. The unfortunate part of concentration risk does not show during the period of the boom because you are exposed to a sector that is performing. However, whenever there is a squeeze in your sector of exposure, you are bound to be affected. The bank would not have gone down if it has properly diversified its deposit base.  The secondary issue was the inappropriate matching of assets and liabilities. I expected that the bank would know its primary market deposit behaviours are largely short-term. It, therefore, stands logic on its head while fund belonging to such sector was invested in long-term instruments. Yes, that instrument is safe to the extent that it guarantees your principal at maturity. However, the rate sensitivity is so high that you may not realise your full value if you fail to hold the instrument to maturity. This is what happened to SVB.

It was obvious the bank was not paying attention to prudential and regulatory issues: Where were the supervisory agencies in all this?

First of all, the Dodd-Frank Act was signed into law by the Obama regime which introduced strict measures for banks operating in the United States following the financial crisis of 2008. However, Donald Trump rolled back some of these measures for small banks operating at less than $250b assets referring to those laws as “excessive bureaucracy”. Given that Supervisors will have to work within the ambit of law and regulations, it is expected that there is enough law to ensure that banks are sound safe, and secure. Although operators would think differently, always believing that banks are over-regulated.

Secondly, it is also important to note that the supervisors will not micro-manage the institution. That is why governance is key in every bank. The board must be disciplined enough to respect policies put in place for the effective and efficient running of its organisation. Experience has shown including this particular case of SVB that momentary successes do not always guarantee that the bank will always be there in the face of reckless behavior and irrational investment decisions.

Some have blamed poor Corporate Governance issues for the collapse. What gaps were left unchecked in your opinion? The board of any institution is responsible for the determination of the Risk appetite and tolerance of any Bank. They have that task to determine when the limit is breached and the need to quickly fix that before it degenerates to a level where such could no longer be tamed. In the instance of SVB, the choice of a business segment to serve and investment securities to apply depositors’ funds would be made or ratified by the board. Therefore, the Board could not be held blameless in all of these. While we may not be able to fault Board composition and balance of power on the Board of the bank, it is obvious that there was a poor investment decision.

The asset-liability management practices in the bank have also been called to question. What in your opinion went wrong?

Like I said at the beginning, the fundamental problem was that the SVB was servicing largely a particular sector of the economy with the short-term need of their fund. However, funds belonging to that sector were applied to long-term securities with high-interest rate sensitivity. The mismatch created problems for the Bank in the final analysis.

So, it is right to say the ALM practices were faulty. It is expected that your fund should be optimally pro-rated in a way to derive optimality. That is, an idle fund to be deployed to generate income while having a contingency fund to meet maturing obligations without incurring the needless cost.

It seems external factors such as government policies and actions play a significant role in the soundness and stability of Banks: How can banking operators mitigate against unfavourable government policies to avoid failure?

Banks must build intelligence. A high-level research team to monitor macroeconomic indices within the economy of their operation. Constant scanning of the external risk factors which include regulatory focus, compliance barometer, and market dynamics. All of these are to be constantly monitored by financial institution operators. The benefits derivable from these ventures are the ability to predict government policy direction and the enhancement of the capacity to respond as appropriate.