The aftermath of Silicon Valley Bank’s collapse continues to have an impact on global markets, leading investors to closely examine the institutions that form the foundation of the startup ecosystem. As a result, some banks’ stock prices have plummeted, despite swift action taken by banking regulators worldwide. In the United States, regulators provided extra protection for SVB’s and Signature Bank’s deposits, guaranteeing them beyond the standard FDIC limit of $250,000. In the United Kingdom, the government arranged for HSBC to acquire SVB UK for £1 in a fire sale, ensuring that startups will continue to have access to cash in the short term. Although the government’s decisive intervention prevented an immediate crisis, SVB’s remaining assets will be either restructured or sold off, and the long-term consequences are yet to unfold.

Before we explore the measures that can be taken by banking firms to restore resilience and trust in the system, let us look at some of the biggest collapses in the global banking ecosystem:

• The Global Financial Crisis of 2008: The collapse of Lehman Brothers in 2008 triggered a global financial crisis. The crisis was caused by subprime mortgage defaults, which led to a liquidity crisis, causing a chain reaction that affected banks and financial institutions worldwide. Many banks were exposed to risky mortgage-backed securities, leading to a lack of trust in the banking system.
• The European Debt Crisis: The European debt crisis began in 2009 and was caused by the inability of some European countries to repay their debts. This led to a lack of confidence in the eurozone, and some countries required bailouts from the European Central Bank and the International Monetary Fund.
• The Asian Financial Crisis of 1997: The Asian financial crisis was caused by a combination of factors, including high debt levels, currency speculation, and a lack of transparency and regulation. It led to the collapse of banks and financial institutions in Asia, and many countries required IMF bailouts.
• The Icelandic Financial Crisis: In 2008, Iceland’s banking system collapsed due to a combination of factors, including a lack of regulation and risk management, as well as aggressive expansion and high levels of debt. The collapse led to a significant loss of trust in the banking system in Iceland.
• The Savings and Loan Crisis in the United States: The savings and loan crisis of the 1980s and 1990s was caused by a combination of factors, including lax regulation, risky investments, and fraud. The crisis led to the failure of many savings and loan institutions and a lack of trust in the banking system.

In light of these events, digital and tech business leaders should pay close attention to the warning signs and take suitable measures which, inter alia, include the following:

Frisk the Risk for Enhanced Resilience

The current situation is not simply a result of a few financial institutions that dominate the startup community. Rather, it highlights market psychology and the importance of learning hard lessons in risk management and resilience. Silicon Valley Bank (SVB), which has been a significant player in the tech industry for four decades, has provided banking services for numerous venture-backed tech and healthcare IPOs. In fact, according to SVB’s data, it facilitated 55% of US-based venture-backed tech and healthcare IPOs that took place in 2021. While this crisis may not alter how businesses innovate with early-stage companies, it should serve as a catalyst for leaders in all industries to scrutinize their partnerships with greater care.

Address Third-Party Risk with Greater Attention and Formal Programs

It is imperative to acknowledge the significance of third-party risk. Forbes’ data indicates that only 20% of enterprise risk management decision-makers regard it as a primary concern within their organizations. Therefore, it is essential to evaluate the potential reputational, regulatory, financial, and operational risks associated with each partnership, as well as those that could affect the partner. Tech leaders must establish formal programs for managing third-party risk (TPRM) that utilize software solutions instead of spreadsheets. This entails employing a dedicated governance, risk, and compliance or TPRM platform to assess risk levels and ensure the compliance of third parties. It is worth mentioning that Silicon Valley Bank itself lacked a chief risk officer for a considerable portion of 2022.

Strengthen Due Diligence and Identify Viable Startup Alternatives in the Tech Stack

IT organizations within the Fortune 500 must increase their due diligence and identify startup alternatives in their tech stack. While it is crucial to test promising products and startups to promote innovation, such endeavors also introduce additional risk. Therefore, it is necessary to 1) closely examine these startups to ensure they are financially stable enough to align with your risk profile and 2) identify alternative suppliers that offer similar or comparable products to facilitate a swift transition in case of any emergencies.

Prepare for Opportunistic Acquisitions of Key Innovators

In the event that a startup you rely on suddenly experiences a lack of viable financing, and your tech stack is dependent on their services, it is important to be prepared to acquire them. Notably, Capital One acquired Critical Stack in 2016 as a substitute for early Kubernetes, while Intuit acquired Applatix a few years later, which was responsible for developing the Argo open source IT automation project for GitOps. Hence, tech leaders must be proactive in identifying post-SVB opportunities for acquisition, as M&A activities are no longer limited to high-tech vendors and cloud hyperscalers.

Apply Lessons Learned from Concentration Risk and Mitigation Strategies

The recent crisis has highlighted the dangers of concentration risk mismanagement by the banks, VCs, and startups involved. For instance, the Canadian adtech company AcuityAds had more than 90% of its cash (representing 65% of its total market value) invested in SVB. It is critical to note that concentration risk isn’t limited to financial investments, chips, and supply chain components in today’s digitally connected and globally interdependent business environment. It arises whenever an overreliance on one area, interconnectedness with other enterprise risks, and the potential for a devastating cascade effect exist.

Therefore, it is crucial to assess concentration risk in five key areas: skills, technology, AI decision-making, data sources, and the emergence of oligopolies in several industries. By doing so, enterprises can mitigate the impact of concentration risk and avoid being overly reliant on any single provider or platform. Moreover, businesses must develop a comprehensive risk management strategy that incorporates concentration risk assessment and mitigation strategies to minimize the impact of future crises.

Applying the lessons learned from this concentration risk example is essential for businesses to ensure they are not overreliant on any single provider or platform. Through proper risk management, enterprises can avoid the devastating consequences of concentration risk and remain resilient in the face of uncertainty.

Invest in trust and innovation to capitalize on the opportunity created by SVB’s void

Trust and innovation are key to filling the void left by the collapse of Silicon Valley Bank (SVB). The financial services industry needs to learn from the failure of SVB and understand that trust is the foundation of any successful banking relationship.

According to Forbes’ data, consumer trust in banks has been declining in recent years, and this trend is expected to continue in 2023. The loss of trust is especially significant in countries such as Australia, Canada, Germany, and the US, where the banking industry has traditionally been held in high esteem.

To regain trust, banks must invest in innovation, transparency, and customer-centric services. They must also adopt new technologies to streamline their operations, enhance security, and improve the customer experience. This will require a significant investment in research and development, as well as partnerships with startups and other technology firms.

In addition, banks must focus on building strong relationships with their customers, based on transparency, honesty, and reliability. This can be achieved by providing clear and concise information about their products and services, as well as being responsive to customer needs and concerns.

Make competence a top priority as trust lever increases in importance

As we face a banking crisis, it’s important to prioritize competence as a key factor in building trust with customers. In the United States, consumers rank competence as fourth out of seven layers of trust, while in Italy it ranks as low as sixth. However, given the current situation, we anticipate that consumers will temporarily elevate competence to a higher position in their trust hierarchy. Some may even move to larger banks that are subject to stricter regulations to ensure their deposits are secure.

To improve the competence lever, banking industry leaders can learn from US investment firms whose customers rank competence as the second most important factor in overall trust impact. Communicating investments in risk management to customers is an effective way to boost confidence in the competence of the bank. By doing so, banks can show their customers that they prioritize the safety and security of their financial assets.

Moreover, as trust in banks continues to decline globally, it’s crucial to invest in innovation that can help fill the void left by the collapse of institutions like SVB. The integration of new technologies, such as blockchain and artificial intelligence, can help banks regain customers’ trust by improving transparency, security, and efficiency. By embracing innovation and demonstrating competence, banks can restore trust and rebuild their reputation in the eyes of the public.

Emphasize customer experience and digital capabilities to serve startups

In the corporate banking sector, digital transformation has not kept pace with that of retail banking. This has been due to several factors, including the complexity of products, the limited number of credible challengers, and strong barriers to switching. The established banks often choose to prioritize their financial strength and focus on securing deposits from non-startup businesses that are “fleeing to quality,” with no significant emphasis on innovation.

However, the recent failure of SVB presents a significant opportunity for a bank willing to invest in improving customer experience, technology, and startup-aware risk management. By doing so, they could capture a significant share of the startup market that is left without a reliable banking partner. This presents a chance for banks to stand out in the market and benefit as these startups grow and scale, requiring more advanced banking services.

To take advantage of this opportunity, banks must focus on improving their digital offerings, such as mobile apps, online banking portals, and other digital tools that enable a more seamless and efficient customer experience. Additionally, they must prioritize investing in technology that is relevant to startups, such as blockchain, AI, and other emerging technologies.

Finally, to gain the trust and loyalty of startup clients, banks must prioritize their risk management efforts. This means investing in tools and processes that enable a proactive approach to risk management and security, such as automated monitoring, early warning systems, and frequent risk assessments.

By seizing this opportunity, banks can not only fill the void left by SVB but also establish themselves as trusted partners for the startup community and benefit from their future growth and success.

Cultural, digital, and leadership transformation to induce resilience in banks

Cultural, digital, and leadership transformation programs are essential for restoring resilience and trust in the banking system globally for several reasons:

Firstly, cultural transformation programs help to create a new culture within the organization that is focused on accountability, transparency, and customer-centricity. By fostering a culture that is aligned with these values, banks can rebuild trust with customers, investors, and regulators.

Secondly, digital transformation programs are necessary to modernize banking systems and processes, improve customer experiences, and drive innovation. A more digitized banking system can help to reduce costs, increase efficiency, and provide customers with more personalized services.

Lastly, leadership transformation programs are essential for creating a leadership team that is equipped to navigate the complex and rapidly changing banking landscape. Effective leaders must be able to anticipate and respond to market disruptions, regulatory changes, and customer needs. They must also be committed to building a culture of trust and transparency within the organization.

Overall, cultural, digital, and leadership transformation programs are critical for restoring resilience and trust in the banking system globally. By investing in these programs, banks can improve their ability to weather future crises, meet the evolving needs of their customers, and regain the trust of stakeholders.

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