Unless you lived in a cave the last few months, you read and heard about, and maybe even felt, a banking crisis looming. The tech cooldown and collapse of several crypto platforms led to a domino effect that brought down Silicon Valley Bank (SVB) and later Credit Suisse.

How could this happen? And more importantly: how can this be avoided in the future?

These questions made me curious, so I invited Eugenie Casier to chat at our virtual round table. Eugenie Casier is the London-based Director of Governance, Risk and Compliance (GRC) at Clausematch, a global regulatory technology company specialising in compliance and policy management. She previously worked as Belgian Branch Manager at Lynx Beleggen, led the European expansion of a FinTech in partnership with ING Bank Netherlands and held various Compliance & Risk roles in financial services.

She frequently speaks at industry events focusing on international regulation and compliance challenges.

The Fall of Silicon Valley Bank

A pivotal moment in the banking industry this year was the fall of SVB, a bank with around 200 billion assets under management, the 16^thlargest bank in the United States. Their niche was startups and tech companies, an industry struggling to reinvent itself because their growth strategies no longer attract the investments they need to succeed with such strategies.

As these companies needed increasingly more deposits to pay their expenses, SVB had to make drastic decisions to guarantee the required liquidity to fulfil customer demand.

Eugenie: “SVB’s CEO, Greg Becker, decided to liquidate securities, long-term investments that had to be cut short, which translated in a loss of $1.8 billion on these securities. Later, Goldman Sachs advised raising about two and a half billion dollars in new equity from institutional investors to cover the loss. Yet, they did not find anyone to fill that gap.”

They miscalculated their risks. Of course, as someone in the audience said: you can try to manage risk, but it is still a risk. We have regulations, checks and balances, and competent authorities control them, but there is also the mindset issue that should be discussed.

The Biggest Cultural Picture

So in the case of SVB: could one blame the economic context? The lack of regulation or supervision? In the end, SVB mismanaged their risks, explained Eugenie. They had large amounts of long-term investments and were aware of their value and how these investments behave. Or they should have been aware of this.

“Ultimately, the management of SVB had a company to run. They were an important business to the US economy. Absolutely”, explained Eugenie. “With that responsibility comes taking that responsibility.”

She linked that to the idea of principle-based regulation vs rule-based regulations. In the United States, regulations tend to be more rule-based, where you can tick the boxes, and you’re OK. SVB was OK in that respect; however, in spirit, they did not tick the boxed after all, as clearly, their assets were insufficient to survive.

Eugenie: “In the spirit of Basel, they did not do what they were meant to do. Rules are in place to protect against the fall of a bank. So if you're applying those rules and you're not protected against the fall of your bank, you're applying them yet not in spirit”.

I guess a completely different debate is how many banks are motivated to apply the Basel requirements stricter if needed, as this affects their results. From the audience, we heard that the bonus system at SVB stimulated excessive risks, resulting in extra income in the short term and disastrous long-term results.

Which brings us to the next issue: how much of the problem was a cultural and organisational problem, and how much was purely a risk management problem?

The example of Credit Suisse was probably even more speaking, given the many scandals over the past few years, fom years-long internal fraud to spying on former executives to involvement in drug trafficking etc.

Eugenie also saw a positive aspect in the Credit Suisse case: “Shareholders lost trust and maybe it's a sign that the mechanism is working; it's a signal from shareholders that say what you're doing here is too far, we step back.”

They were saved in a mutual effort by UBS, another Swiss bank and the Swiss government. A necessary merger to avoid further propagation of fear in financial markets?

Can (Reg)Tech Prevent a New SVB or Credit Suisse?

Having worked in compliance and working in a regtech company right now, Eugenie has a unique view on the possibilities when it comes to technology helping apply the right rules and principles to avoid painful situations like SVB and Credit Suisse.

But is technology enough?

“It is not responsible anymore to not have yourself strengthened with technology and use technology to do your risk management and make sure that you're compliant overall”, she explained. “In my view, compliance is a long chain of communication. It starts with the society that has expectations, which are translated in regulation, and technology is there to ensure this is communicated to organisations and businesses.”

Technology augments the role of compliance officers, taking away much of the administrative work of these compliance experts so they can do more valuable work for the organisation.

Regarding risk management, Eugenie still observes much fragmentation, with many departments making their own evaluations and missing the bigger picture. This bigger picture can be solved with technology, but also with a cultural shift and a growing awareness of one’s responsibility towards society. These actions will hopefully avoid a new SVB.

Eugenie: “Corporate culture is so important, especially for financial services. Have we learned our lesson? I don't know. It's bizarre that there is so much more noise about doing the right thing, being ethical and socially responsible. Yet, we're still mainly doing business. We have so many unethical business models. I think now we may see a decline in that.”