Taking action: What financial institutions can do in the wake of bank failures

Overview

Financial institutions need to understand what led to the recent failures of Silicon Valley Bank, Signature Bank of New York and Silvergate Bank so they can enhance their organizations' risk management activities and meet increased regulatory expectations while also maintaining customer confidence.

Authored by RSM US LLP


Financial institutions need to understand what led to the recent failures of Silicon Valley Bank, Signature Bank of New York and Silvergate Bank so they can enhance their organizations’ risk management activities and meet increased regulatory expectations while also maintaining customer confidence.

As the industry continues to assess the impact of these failures, leadership teams at financial institutions can take proactive steps to mitigate risks stemming from the numerous precipitating factors. Various forms of stress-testing, scenario modeling and risk management are key solutions that enable banks to improve their planning and readiness for the future.

Such solutions will be especially crucial given the carousel of money—in the hundreds of billions—moving to and from various financial institutions at a rapid clip since the bank failures. Institutions have already tapped into $11 billion of loans from the Bank Term Funding Program and moved $150 billion into money market funds over the last week and more than $100 billion to the Federal Reserve’s repo facility. Roughly $120 billion moved from financial institutions into money market mutual funds between March 8 and March 15. Much of that was likely from small and medium-sized banks.

Roughly $120 billion moved from financial institutions into money market mutual funds between March 8 and March 15. Much of that was likely from small and medium-sized banks.

Here are critical areas heavily affected by current volatility in the sector and the broader macroeconomic environment, along with key actions leadership teams may consider:

Liquidity and asset liability management

  • Evaluate the need to update existing liquidity stress indicators, metrics, guidelines, and limits, and their impact on the frequency, depth, and escalation of liquidity modeling and monitoring
  • Intensify both the severity and duration of liquidity stress scenarios
  • Expedite testing of contingency funding plans—including accessibility to Fed fund lines, lines of credit, and other sources of liquidity—as well as communication plans that can be internally escalated at a rapid pace
  • Identify and pledge qualifying assets to secure additional borrowing capacity for existing lines of credit
  • Monitor the utilization of borrowers’ unfunded lines of credit and determine the corresponding impact on the institution’s liquidity position; analyze borrowers’ credit quality as access to capital tightens
  • Plan for scenarios that may lead to use of the Federal Reserve’s Bank Term Funding Program
  • Increase the frequency of interest rate risk (IRR) modeling routines
  • Update IRR modeling stress scenarios to reflect recent and projected changes to short- and long-term interest rates (incorporating both upward and downward shocks), and anomalous deposit behavior
  • Reevaluate and sensitivity-test core IRR modeling assumptions (e.g., asset prepayment rates, liability decay rates, betas, lags, etc.) reflecting current market conditions
  • Evaluate courses of action outlined in a liquidity contingency plan, and their potential impact on the balance sheet and prospective exposure to IRR
  • Evaluate reliance on noncore funding, the transient nature of potential new deposits, and any corresponding repricing implications 

Concentration risk

  • Monitor customer concentration risks, for both lending and deposit (e.g., by industry, geography or specialization)
  • Assess new concentrations of credit risk resulting from recent events (e.g., suppliers/vendors for technology or life sciences companies that may be acutely affected, commercial real estate credit risk due to a hybrid workforce, and associated downstream changes)
  • Monitor unrealized loss positions within the investment portfolio (consider both market- and credit-related loss attribution) and explore opportunities to reposition the investment portfolio’s duration and issuer mix 
  • Evaluate counterparty exposures 

Customer considerations

  • Update public relations plans and communicate expectations across the enterprise
  • Leverage existing customer relationship management platforms or data to identify and strengthen transactional relationships
  • Reinforce the importance of operational and customer service excellence at the first line
  • Monitor the potential for fraud and compliance risks related to new accounts
  • Monitor news and filings for geographic peers as an input to strategic decision-making
  • Proactively communicate with customers whose balances exceed the limits insured by the Federal Deposit Insurance Corp. regarding the relative strength of the institution’s balance sheet, liquidity and capital position

At a higher level, leadership teams should also understand the integral role the risk function plays in analyzing and mitigating the many risks that affect their institution. A formalized enterprise risk assessment that is updated on a regular basis can assist an institution in identifying areas of increasing or outsize risk in a timely fashion. This should trigger deployment of a mitigation strategy to prevent massive shocks and potential failure that could come to fruition if not addressed.

Furthermore, the board and relevant board-level committees should zero in on the issues detailed above to ensure they are not only providing proper governance to management but effectively challenging the institution’s risk management processes when needed.


This article was written by Nicholas Hahn, Andrew Broucek, Angela Kramer, Brandon Koeser and originally appeared on Mar 20, 2023.
2022 RSM US LLP. All rights reserved.
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