Much has been written, and much more will be written about Silicon Valley Bank and its rapid demise over the past several weeks for perhaps the next several months or maybe even years to come. All that I’ve read so far, I really have three reactions as it relates to ERM, that have very little to do with banking. One, is the Chief Risk Officer, two is the Risk Committee of the board, and the third is arrogance. Allow me to describe.
The Chief Risk Officer, number one, it was a position that was not held in high regard at Silicon Valley Bank. It was a position that was held vacant for eight months during a very critical time not only for that bank but also the financial services sector for the past 15 years or maybe even arguably over the past 40 years as the Federal Reserve Bank made it very clear that it was going to raise interest rates in order to be able to tame inflation. Had that position been empowered perhaps the situation at Silicon Valley Bank would be very different today.
The second is the Risk Committee of the Board. Apparently the Risk Committee of the Board had met 18 times within the past year. That is more times than they had met cumulatively in the previous three years. The Risk Committee of that Board was composed of the chairs of other Committees of the Board. In addition, it was composed of two members who I would consider to be heavyweights. One was a former Vice Chair of the U.S Treasury and the other was a former Vice Chair of a large international accounting and consulting firm.
What is ERM?
It is a framework used by not only banks and financial institutions, but organizations across all business sectors to identify, assess, monitor and manage risks across the organization. ERM is an essential tool for organizations to achieve their objectives, by helping them to effectively manage risks that could impact the organization’s financial and operational performance, reputation, and regulatory compliance.
The ERM framework encompasses a wide range of risks that not only banks like SVB may face, but also risks faced by many organizations across all business sectors such as credit risk, market risk, operational risk, liquidity risk, legal risk, regulatory risk, and many others. This is a continuous process that involves ongoing monitoring and review of risk exposures and risk management strategies. Organizations must regularly assess the effectiveness of their ERM program to ensure that it remains aligned with their risk appetite and strategic objectives. ERM can help organizations make informed decisions, optimize their risk-return profile, and enhance their overall resilience and sustainability. Examples include:
- Utilizing various insurances
- Proper maintenance of personnel, adding or changing skills, and training
- New and/or improved technological uses
- Implementing and structuring defined protocols and procedures
What were the Faults in the ERM Program with Silicon Valley Bank?
The members of the Risk Committee of the Board were clearly bright people but they clearly failed their role, they failed their Charter, they failed their shareholders, and they failed the depositors of the bank. I think what’s also interesting is that each of the members of the Risk Committee received fees in excess of two hundred and fifty thousand dollars in 2022 and were slated to earn over three hundred thousand dollars of fees in 2023. That number seems awfully generous at this point, given the outcome. However, statistics like these really give rise to the concept of stakeholder capitalism and add more fire to the thinking behind that, so we’ll have to see what develops there.
The third is arrogance – the arrogance of the CEO and the arrogance of the senior leadership team in their disregard to effectively manage their situation as related to interest rate risk. It was very clear that the Federal Reserve was keen on raising interest rates and so their disregard for that risk management is something that has to be evaluated.
The Risk Committee of the Board can never be distracted by the charm or perhaps the force of the CEO and certainly the fees involved in their role.
Perhaps the punch line about Silicon Valley Bank is that it had a dysfunctional culture.
Why is culture so important to an ERM Program?
Having a strong risk culture and ensuring that all employees understand their roles in risk management is a critical foundation for a successful ERM program. A successful and well thought out ERM program helps organizations to identify and prioritize risks that could impact the ability to achieve their strategic objectives.
By addressing these risks, organizations can:
- Improve their operations
- Reduce costs
- Prevent unpleasant surprises such as financial losses, reputational damage, regulatory sanctions, or worse.
A successful ERM program can also enhance organizational sharpness and resilience by anticipating and managing potential risks and opportunities. By proactively identifying and managing risks, organizations can improve their decision making processes and respond more quickly and effectively to changing market conditions.
A successful ERM program creates value for organizations by improving risk management practices, enhancing operational efficiency, and mitigating risks that could impact their ability to achieve their strategic objectives. For more information about Enterprise Risk Management check out ermexchange.com and be sure to subscribe to our Youtube Channel.