Root Cause Analysis of the 2023 Banking Crisis
The Silicon Valley Bank (SVB) collapse is dominating the news right now. From the analysis of why it happened to commentary on what the federal government’s role should be, everyone seems to have something to say. As the story unfolded, tech companies with SVB deposits worried about going bankrupt while the financial industry and taxpayers worried about the potential impact on the larger financial services industry. The immediate crisis may be over as the US government has stepped in to secure deposits and HSBC purchased SVB in the UK, but the analysis of what went wrong and how to prevent future bank runs will continue.
The SVB Collapse at the 101 Level
While it seems like modern financial systems should be sophisticated enough to avoid bank runs, the SVB meltdown demonstrated otherwise. Much of the press centered around two themes contributing to the collapse.
Lack of diversification
SVB invested primarily in U.S. bonds. While traditionally considered a safe investment, SVB purchased a large number of longer-term bonds at very low interest rates. As the Federal Reserve increased interest rates to fight inflation, SVB was forced to sell the bonds at a loss. Discussions among SVB customers about their potential inability to pay depositors led to withdraws and ultimately, a bank run.
Deregulation
In 2018, Congress passed legislation that resulted in smaller banks, like SVB, falling outside of the more stringent regulations imposed on larger banks to prevent these types of crises. The small banks argued, and Congress supported, that they were too small to create risk for the overall industry.
Diving Deeper into the Root Causes
While Coherent had no direct risk from the SVP collapse, we do work with many large financial institutions that have shared their unease around the situation. These conversations have led us to believe that beyond the obvious factors leading to the SVB situation, the root causes go much deeper and include:
Risk management in uncontrolled spreadsheets
Many financial institutions rely on hundreds or thousands of spreadsheets to manage business-critical processes. Siloed spreadsheets on desktops typically lead to challenges with tracking, auditability, and transparency. In other words, uncontrolled spreadsheets for mission-critical processes can introduce significant risk.
Lack of integrated modeling
Siloed spreadsheets on desktops are by definition not going to be integrated. If models related to liquidity, capital, and credit risk are living in separate places, it’s difficult to have controlled simulations. For example, if interest rates increase by X, what will the impact on liquidity be? Without integrated modeling, this type of scenario planning can be arduous, potentially inaccurate, and possibly conducted too infrequently.
Poor bank-level visibility for regulators
With different risk profiles residing in different silos, it’s difficult for regulators and auditors to have an integrated view of bank-level risk. Integrated modeling would make it easier for regulators to have more real-time visibility and agility. Regulators need the ability to easily and quickly stress-test different scenarios that show the full impact on risk management, which is virtually impossible with uncontrolled spreadsheets. In this case, the impact of rising interest rates was probably not sufficiently stress-tested on SVB’s liquidity.
Integrated Data Platforms Reduce Risk
Financial institutions are heavily dependent on Excel as no other tool matches its flexibility in creating and defining complex business logic. But Excel’s strengths are also its inherent weaknesses. It’s easy to use and accessible, which leads to uncontrolled, disconnected models that lack visibility and traceability.
Integrating Excel-based data models into a single interoperable platform can move risk management from reactive to proactive. Financial institutions need the ability to rapidly stress test different scenarios and look at the impact of potential changes within a single, integrated risk profile. Spreadsheet interoperability is the solution to uncontrolled spreadsheets.
Solving the Uncontrolled Spreadsheet Challenge
Coherent was founded to help companies, including those in regulated industries, use Excel for its intended purposes while simultaneously eliminating its drawbacks. By quickly and easily converting complex spreadsheets into enterprise code, Coherent’s Spark platform enables spreadsheets to be controlled in a centralized manner. Models can be quickly connected to an enterprise-wide system, bringing the power and speed of cloud-based computing to your spreadsheets with no coding required.
With robust governance, control, and audibility, many of the fundamental issues with risk, integration, and visibility disappear.
Ready to Move to Proactive Risk Management?
If you have business-critical processes in Excel, they probably lack control, integration, and visibility. Regulators are cracking down on spreadsheet-based errors, so now is the time to find a solution that eliminates the errors without the painful process of trying to eliminate Excel.
Contact a Coherent Spark expert to learn more about how our platform does exactly that. Turn your spreadsheet models into enterprise-wide code in seconds - today.
