Silicon Valley Bank crash highlights financial fragility

After banking regulators shut down Silicon Valley Bank, or SVB, on Friday after the bank suffered a sudden, swift collapse, marking the second-largest bank failure in US history, businesses around the world panicked.

SVB had signalled a cash crunch just two days before it went under. In an effort to raise money, the bank first attempted to sell shares and then sell itself - but these actions spooked investors and ultimately led to the bank's collapse.

The incident has sent shock waves throughout the tech sector. Customers and companies with money in SVB attempted to pull out their funds earlier in the week, contributing to the bank's demise. However, not everyone was able to withdraw their funds, and those with deposits exceeding $250,000 are now faced with potential losses.

This has caused some uncertainty across the banking industry, as concerns grow that other banks could also be at risk or that contagion could set in. It is important to note that, for consumers, the money they currently have in the bank is most likely safe. However, the collapse of SVB is a significant event and a symptom of larger forces at play within the tech, finance, and economic sectors.

As The Telegraph's Matthew Lynn explains, the possibility of a full-scale bank run presents a significant threat. Central banks must act swiftly and decisively to prevent the situation from spiralling out of control. However, it's equally important that they heed the lessons of the 2008-2009 financial crisis. While depositors should be protected, bondholders and shareholders should be left to fend for themselves. Additionally, it's crucial that we avoid returning to the lax monetary policies of the past decade, or else we'll have failed to learn anything from the previous crisis and risk repeating the same mistakes.

Lynn also explains that although each collapse can be explained independently, they all share a common thread: the central banks, led by the Federal Reserve, rapidly raised interest rates and began unwinding, and in some instances, reversing quantitative easing. This marked the end of the easy money era and resulted in a significant drop in bond prices. Silicon Valley Bank suffered enormous losses on its portfolio, while pension funds were caught off-guard with LDI's that assumed bond yields would remain stagnant. As liquidity decreased and genuine yields returned to real assets like Treasury bills, weaker alternatives like Bitcoin plummeted, triggering the FTX crisis. While the circumstances varied, the root cause in each instance was the tightening of monetary policy.

Companies can take steps to protect their assets from failing banks by diversifying their banking relationships and conducting due diligence on their banking partners. This means that companies should not rely solely on one bank for all their financial needs, but rather spread their deposits and loans across multiple institutions. By doing so, they can reduce their exposure to any single bank and minimize the risk of losing their assets in the event of a bank failure.

Every company should conduct regular due diligence on their banking partners to ensure that they are financially stable and have a strong track record of managing risk. This could involve reviewing the bank's financial statements and credit ratings, as well as seeking out independent assessments from credit rating agencies and other financial experts. Companies should also consider the regulatory environment in which the bank operates, as well as any legal or political risks that may affect the bank's stability.

Another approach that companies can take to protect their assets is to use financial instruments, such as letters of credit and bank guarantees, to reduce their reliance on a single bank. These instruments can provide additional security for companies by guaranteeing payment for goods and services even if the bank fails.

Protecting assets from failing banks requires a proactive approach that involves diversifying banking relationships, conducting due diligence on banking partners, and using financial instruments to mitigate risk. By taking these steps, companies can minimize the impact of bank failures on their operations and ensure that their assets are protected.

Businesses must take measures to protect their financial assets by implementing various strategies that include diversification, risk management, and asset protection. Diversification of assets involves investing in a variety of financial instruments and sectors to minimize the impact of market volatility. This helps to protect the business from significant losses in any one particular area.

Risk management involves identifying, assessing, and mitigating various risks that may impact the business's financial assets. This includes taking steps to protect against market risk, credit risk, and operational risk. For example, businesses can use hedging strategies, such as options or futures, to reduce market risk exposure, while carefully vetting vendors and customers can help minimize credit risk.

Asset protection strategies involve safeguarding financial assets against external threats. This includes protecting against theft, fraud, cyber-attacks, and natural disasters. Businesses should implement appropriate security measures, such as firewalls, encryption, and backup systems to protect their digital assets. Physical assets, such as cash and inventory, should be secured with appropriate safes, locks, and monitoring systems.

Protecting financial assets requires a multifaceted approach that involves diversifying investments, managing risks, and implementing appropriate asset protection measures. By taking these steps, businesses can minimize the impact of external threats and safeguard their financial health for the long term without placing crucial assets in a shaky bank.

By Daniel Elliot

Daniel is a business consultant and analyst, with experience working for government organisations in the UK and US. On his free time, he regularly contributes to International Business Times UK.