NATIONAL ECONOMICS UNIVERSITY & CARDIFF METROPOLITAN UNIVERSITY

SCHOOL OF ACCOUNTING AND AUDITING

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FINANCIAL REPORTING
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Lecture: MONEY, BANKING AND RISK

Lecturer: KHUC THE ANH

Class: BIFA 8E

Students’ name:
NGUYEN CHAU ANH – CMU10620

Table of Contents
I. Introduction.........................................................................................................................................2
II. Comply with FED and Basel II regulations............................................................................................2
1. Basel II compliance..........................................................................................................................2
2. Through FED supervision.................................................................................................................3
III. Why Did SVB Fail Despite Compliance?...........................................................................................3
1. Facing many risks.............................................................................................................................3
2. Risk analysis, forecasting and management are flawed...................................................................5
IV. Lessons learned from the collapse of SVB.......................................................................................6
V. Conclusion...........................................................................................................................................6
VI. References.......................................................................................................................................7
 I. Introduction

In the year 2023, a series of events occurred, causing significant turmoil in the
financial market. Notably, the collapse of SVB Bank on March 10, a renowned
financial institution and one of the largest banks in Silicon Valley with a long-standing
history dating back to its establishment in 1983. This is the largest bank bankruptcy in
the United States since the 2008 global financial crisis (TD,2023). Although the bank
ostensibly met the strict regulatory requirements set by The Federal Reserve (Fed) and
Basel II, SVB still collapsed, raising questions about the effectiveness of the
frameworks. These regulations and the challenges that banks face in today's extremely
complex financial development context.

This essay aims to elucidate the reasons behind SVB's collapse despite its compliance
with Fed and Basel regulations. SVB had met the prescribed criteria on paper, but in
the intricate realm of the current financial market, it succumbed to the confluence of
interest rate risk, liquidity risk, and concentration risk.

II. Comply with FED and Basel II regulations

1. Basel II compliance

- Basel II is the second version of the Basel Accords, which sets out the general
principles and banking laws of the Basel Committee on Banking Supervision. Basel II
is an international framework designed to ensure the stability of the global banking
system, issued in June 2004 to define capital standards to limit banks' business risks
and strengthen the financial system (Wikipedia, 2023). In Basel, there are "three
pillars" including: Maintaining the required capital ratio; Providing better policy-
making tools than Basel I (at the same time providing a solution framework for risks
that banks must face with strategic risks, systemic risks, etc. are summarized with the
term "residual risk"; Information needs to be disclosed according to market principles
(Tran, 2021). While Basel III is being developed, Basel II is the highest standard and
has been quickly applied in many countries, including the United States, United
Kingdom and Vietnam.
- SVB has complied with Basel II requirements, but while this framework is
comprehensive, it may not fully consider the specific risks associated with SVB's
business model, such as overreliance on government bonds.

2. Through FED supervision

The Federal Reserve plays an important role in supervising and regulating banks in the
United States. It sets monetary policies, conducts stress tests and evaluates the overall
health of the banking industry.
 However, the collapse of SVB, despite being under Fed supervision, demonstrates
potential limitations in the regulatory framework's ability to prevent bank failures.

Normally, US banks with assets under $250 billion do not have to go through the most
difficult supervision stages (Mai, 2023). At the end of 2022, SVB has total assets of
209 billion USD - according to FDIC. Therefore, even though it had to do the Fed's
tests and passed them, SVB still faces risks that could lead to collapse.

III. Why Did SVB Fail Despite Compliance?

1. Facing many risks

 Concentration of Capital

Concentration risk is a concept that refers to the possibility of affecting income, the
possibility of significant losses arising when a bank or a financial institution allocates
its resources, capital or assets to one customer, partners, products, ... a single type of
asset (Phạm, n.d.). Focusing on a single, highly liquid asset class may seem like a low-
risk strategy, but it can leave banks vulnerable to immediate crisis.
By the end of 2022, SVB has about 42% of its total assets invested in government
bonds. Deciding to believe in bonds that are considered to have high liquidity such as
government bonds is a safe decision. But SVB's mistake was not dividing its capital to
invest in other investment channels but only focusing most of its capital on one type.
When government bonds encounter negative impacts, most of SVB's investments will
encounter problems.

In addition, SVB also invests too heavily in a few fields such as technology,
innovation, and health services, which are risky fields with many fluctuations when the
economy adjusts (Cấn , 2023).
SVB's failure shows the importance of diversifying investment types in commercial
banking.

 Interest Rate Risk

Interest rate risk refers to the possibility of value and returns falling due to unforeseen
changes in interest rates. This risk is typically associated with fixed-income assets such
as bonds, as opposed to equity investments. Interest rates play a key role in
determining bond prices. Interest rate risk is an inherent concern of banks and is
classified into market risk. SVB as well as all other banks have to face this risk when
facing the FED's decisions to increase or decrease interest rates.

The Federal Reserve System has adopted a hawkish policy stance, which is a policy of
raising interest rates, with the desire to control inflation in the wake of the Covid-19
pandemic. From the beginning of 2022 to the time of SVB's collapse, the FED
increased interest rates 8 times in a row (Tepper, 2023). This causes government bond
prices to tend to decrease. SVB invested 90 million USD in bonds, accounting for
nearly 42% of the bank's total assets, so it is easy to understand that SVB was heavily
affected by this policy.

Investing heavily in government bonds, it exposes banks to interest rate risk when the
interest rate environment changes along with the risk of capital concentration as
analyzed above. When bond prices fall, although there is no need for annual
revaluation, it is estimated that the value is only about 76 billion USD and the
unrecorded loss is 15 billion USD (Cấn , 2023). This caused SVB's net worth to fall,
which of course shook the confidence of depositors and investors, eventually leading
to liquidity problems.

 Liquidity Risk

Liquidity risk occurs when a bank or financial institution is unable to meet short-term
obligations and fund its operations when depositors, investors withdraw their funds, or
when unexpected cash outflows occur due to a lack of cash or liquid assets.

SVB's holding of large amounts of government bonds makes SVB vulnerable to

liquidity risks. As interest rates rose and the value of these bonds fell, SVB's ability to
access cash quickly was affected.

Customers depositing money at SVB are mainly technology startups and venture
investors. High interest rates pose a major obstacle to technology companies, causing
technology stock prices to decline, making it difficult for companies to raise capital.
When the company's capital dries up, the company will begin to withdraw money out
of the bank.

In addition, the internet has made the wave of withdrawals from banks stronger. There
are too many articles and tweets on Twitter mentioning the possibility of SVB's
collapse, shocking the banking sector and regulators. and experts. Investors from
companies to individuals rushed to the bank to withdraw money because of overblown
concerns.

“High interest rates also reduce the value of US Treasury bonds and other securities
that SVB needs to sell to pay creditors. All of these factors together lead to depositors
rushing to withdraw money, forcing the FDIC to take over SVB" said Moody's chief
economist Mark Zandi (Huy -, 2023). The massive withdrawal in a very short period
of time, SVB became distraught, with liquidity risks so high that the bank lost control.
In SVB's 2022 annual report, it said there was $35 billion in reserve liquidity for lack
of liquidity, but in reality, just after March 8 when SVB announced the sell-off of a
series of securities. securities and will sell 2.25 billion USD of new shares to
 strengthen the balance sheet, SVB customers tried to withdraw 42 billion USD. At the
end of March 9, SVB had a liquidity shortage of nearly 1 billion USD and could not
cover its liquidity at the FED.

It can be said that liquidity risk is the direct risk that causes SVB to collapse.

2. Risk analysis, forecasting and management are flawed

As the 16th largest bank in the US system, SVB does not follow any specific liquidity
ratios, but mainly liquidity regulations are internal assessments. In SVB's 2022 annual
report, it said “. As of December 31, 2021, we had less than $50 billion in WSTWF, so
we are not currently subject to the LCR and NSFR requirements.” LCR is Liquidity
Coverage Ratio and NSFR is Net Stable Funding Ratio, these are regulations added in
Basel III (reformed based on Basel I and Basel II agreements) in January 2013 and
October 2014 (Bank for International Settlements, 2017).

Despite repeated warnings from the FED, risk management is still not taken seriously.
In 2021, a Fed review found serious weaknesses in how the bank managed major risks.

The Fed's warnings at that time showed that SVB was handling it very poorly in
ensuring enough cash resources for difficult situations. But the bank failed to patch
those vulnerabilities. Deposits increased rapidly from 60 billion USD in the first
quarter of 2020 to 175 billion USD by the end of 2022, making SVB even more
subjective in reviewing liquidity risks. By July 2022, SVB was assessed as ineffective
in management and control. By early 2023, SVB was once again identified with many
shortcomings in risk management after the FED's assessment (Xuân, 2023).

Mr. Clifford Rossi, Former Director of Risk Management at Citigroup and a professor
at the University of Maryland, was surprised by SVB's low level of risk provisions. He
estimates that the bank's reserve program must double in size.

In addition, tests on the Fed's pressure on the largest US banks in 2022 did not take
into account the scenario of sharp increases in interest rates (Engler, 2023).

IV. Lessons learned from the collapse of SVB

 Diversification is key: SVB's focus on government bonds poses many risks at

the same time, showing the importance of portfolio diversification. Banks must
spread their investment accounts across different asset classes to minimize the
risks associated with any one portfolio.
 Compliance and proactive risk control: With the current financial market
situation, meeting legal requirements is necessary, but in addition, banks must
proactively assess and handle risks beyond simple manual work.
  Important role of supervisory agencies: Regulatory agencies need to pay more
attention to stress testing and scenario analysis in a more rigorous and specific
way for banks and financial institutions. There needs to be more specific and
quick warnings and directions for banks to promptly respond.

Currently, Basel III, which is the third version developed based on Basel II and Basel I,
has been applied through many additions and added many new, more stringent standards
in an effort to improve the ability of banking system in responding to financial stress,
improving risk management and promoting transparency (Bloomenthal, 2022).

V. Conclusion

The collapse of Silicon Valley Bank (SVB) in 2023, despite its apparent compliance
with regulatory requirements, raises important questions about the effectiveness of
existing banking regulations. SVB's exposure to interest rate risk, liquidity risk and
capital concentration in government bonds played an important role in SVB's collapse.
Regulatory frameworks such as Basel II and Federal Reserve supervision may not
fully account for banks' unique risk profiles and the rapidly changing financial
landscape.

To prevent similar incidents from happening in the future, regulators must consider the
need for more appropriate risk assessment, dynamic monitoring of banks' risk profiles
and focus on diversification as a risk mitigation strategy. The SVB case serves as a
stark reminder that compliance with regulatory standards alone may not be enough to
ensure the stability and resilience of financial institutions in today's economic
environment more developed. Regulatory frameworks must therefore evolve and adapt
to address the increasing challenges that banks face in the modern financial landscape.

VI. References
1. TD, T. báo T. chính V. (2023). Silicon Valley Bank - ngân hàng lớn
nhất Thung lũng Silicon tuyên bố phá sản. [online] Thời báo Tài chính Việt
Nam. Available at: https://thoibaotaichinhvietnam.vn/silicon-valley-bank-
ngan-hang-lon-nhat-thung-lung-silicon-tuyen-bo-pha-san-123287.html
[Accessed 27 Oct. 2023].
2. Wikipedia. (2023). Basel II. [online] Available at:
https://vi.wikipedia.org/wiki/Basel_II [Accessed 27 Oct. 2023].
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[online] HOA TIÊU.vn. Available at: https://hoatieu.vn/bieu-mau/basel-2-
la-gi-dac-diem-va-chuan-muc-basel-2-179064 [Accessed 28 Oct. 2023].
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Available at: https://vnexpress.net/su-co-silicon-valley-bank-4580453.html
[Accessed 28 Oct. 2023].
7. Tepper, T. (2023). Federal Funds Rate History 1990 to 2022. [online]
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https://www.forbes.com/advisor/investing/fed-funds-rate-history/.
8. Huy, A. (2023). Những Điều Cần Biết Về Vụ Sụp Đổ Của SVB. [online]
Nhịp Sống Kinh Tế Việt Nam & Thế Giới. Available at:
https://vneconomy.vn/nhung-dieu-can-biet-ve-vu-sup-do-cua-svb.htm
[Accessed 29 Oct. 2023].
9. Bank for International Settlements (2017). Basel III: International
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10. Engler, H. (2023). US Regulation after SVB’s collapse: What Regulators
Can Do and Where Congress Needs to Act. [online] Thomson Reuters
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bank-regulation-post-svbs-collapse/ [Accessed 29 Oct. 2023].

11. Bloomenthal, A. (2022). Basel III: What It Is, Capital Requirements, and
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