Former risk officials from Silicon Valley Bank and Credit Suisse, both of which collapsed in March 2023, spoke Tuesday about lessons the industry can draw from
SVB collapsed after a rapid deposit run. Less than two weeks later, Credit Suisse was on the verge of failure when it entered into a forced merger with its Swiss rival UBS.
At a conference this week on culture and conduct risk in the banking sector, the speakers included Mark Watson, SVB's onetime head of management governance, and Lara Warner, past chief risk officer at Credit Suisse.
They did not discuss internal decisions that may have contributed to the downfall of the two institutions. But they did address broader takeaways about risk management from
One theme of the session was the need to ensure that business growth does not outpace an organization's ability to understand the risks it's taking.
"'The one thing as a supervisor I would watch for as a very strong indicator is: Does management slow down or stop growth activity to let controls catch up?" Warner said. "That is a very hard thing for human beings to do in general. It's hard for management to do. It's hard for boards to do. It's even hard for supervisors to do."
The panel's moderator interjected to note that Wall Street wants to see growth — and wants to see it immediately.
"Well, yeah, sure, but they also don't like the outcomes when things go awry," Warner responded. "It's very difficult pressure for anyone to manage. But at the end of the day, that is probably one of the most important things you can do. And there are leaders out there that will do that."
Rapid growth has been identified as an important factor in the undoing of Silicon Valley Bank, which tripled in size between 2019 and 2021. The bank's parent company recorded asset growth of 271% between the end of 2018 and the end of 2021, according to
"The interest rate risk was obvious," Randal Quarles, a former Fed vice chair for supervision, said during another session at the conference.
"It was a simple matter of looking at the balance sheet. All you really needed was a single accountant, and if he had a flair for the dramatic, a green visor," he said.
Quarles noted that SVB's parent company had 31 open supervisory findings, including so-called matters requiring attention, in March 2023. He argued that supervisors were not asleep at the switch, but they were looking at the wrong issues.
"They were paying a lot of attention to SVB. They were just focused on the wrong things because they didn't view it as really key to their job to prioritize what was important for the institution," he said.
Watson, the former SVB executive, contended that not enough attention gets paid, as part of risk management, to companies' business models.
"I think strategy gets short shrift. I'm not sure regulators focus on it," he said. He argued that business models don't get tested frequently enough, which is a problem amid rapid change in the marketplace.
"They're not as durable as they used to be," Watson said.
Watson also argued that there are "some really naive beliefs" about what a board of directors can realistically do to oversee risk. He said that directors are typically on-site for only about 130 or 140 hours per year.
"They're there less than the regulators are there. They have a lot to get through," he said.
The circumstances of Credit Suisse's demise had certain similarities to — but also differences from — the factors that led to SVB's failure. Like SVB, Credit Suisse went down rapidly after a deposit run.
"SVB disappeared in 40 hours from announcing a capital raise. Credit Suisse disappeared over the weekend," Watson noted. "And the contagion was really fast. There was a belief in the market clearly that these weren't idiosyncratic issues."
But the cause of the deposit run at Credit Suisse was different than at SVB. One factor that led to a loss of confidence in the Swiss banking giant was risk management failures in connection with Archegos Capital Management, a family office that collapsed. But the bank had also been plagued by other scandals.
In a new report, Starling Insights, a membership-based platform that offers resources to understand nonfinancial risks, cited Credit Suisse as an example of why regulators should view conduct risk management as a prudential matter.
"The conduct risks that follow from organizational culture are not typically treated as matters of concern to prudential regulators," the group wrote in its report. "Yet, as the near-failure of Credit Suisse attests, deposit flight is rapid when customers and investors lose faith in management, and this faith can be lost after persistent misconduct scandals."
Starling Insights organized this week's conference in connection with the release of its report. Its founder and CEO, Stephen Scott, argued that an inertia problem needs to be overcome, as questions persist about how much responsibility for bank issues lies with the regulators versus the banks, and which people inside the banks are accountable.
"There's a lot of finger pointing," Scott said in remarks at the conference, "but there's not a lot of people raising their hands and saying, 'I've got it.'"
