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Improving Financial Crisis Mitigation Strategies with Risk Analysis

Mar. 31, 2023
Lumivero
Published: Mar. 31, 2023

In Light of the First Republic Bank, Silicon Valley Bank, and Signature Bank Crises

The recent First Republic Bank, Silicon Valley Bank, and Signature Bank crises sparked significant concern and sowed distrust in the financial system among both the banks’ customers and the general public. While bank collapses of this scale have not been seen since the 2008 financial crisis, according to The New York Times article Banking Turmoil: What We Know, the memory of the rampant fear and uncertainty from that time remains fresh.

“Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year,” said Jeanna Smialek in The New York Times article Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems. “The bank was using an incorrect model as it assessed its own risks amid rising interest rates, and spent much of 2022 under a supervisory review."

Ensuring Business Continuity Amid Crises

With the current turbulent financial climate, the decisions made by Silicon Valley Bank caused their customers to panic and instigate a bank run. Signature Bank was in a comparable situation, with close to nine-tenths of their roughly $88 billion in deposits being uninsured according to regulatory filings, and was forced to temporarily close their doors.

Following those two crises, “First Republic Bank has been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks,” according to The New York Times article Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control.

Knowing their perilous position, could Silicon Valley Bank have made different decisions to prevent or better mitigate the bank run and eventual collapse through improved risk analysis and strategic external communication?

This question is also applicable more broadly; Does an organization’s income statement and balance sheet take risk into consideration?

Whether the business’s risks are chosen (e.g., where to invest, how to communicate with stakeholders, levels of production) or out of one's control (e.g., natural disasters, policy changes, supply chain issues), it is an organization’s responsibility to ensure business continuity. With this latest bank crisis, the fluctuations in interest rates, bonds, and cryptocurrency – plus the possibility of a bank run – were the major risks at play.

By calculating the probability of each event occurring and to what extent, analysts can use Monte Carlo simulation to show the best, worst, and most-likely outcome. In this way, any organization, including Silicon Valley Bank, can use Monte Carlo simulation to accurately demonstrate their business continuity – bolstering confidence in their ability to improve their financial situation. Additionally, by calculating the possible effect of their decisions, they can optimize their policies and approaches to minimize public concern.

While linking the risk register to cash flow using risk management software is not currently widespread practice, the standard for reporting and ensuring business continuity is rising and even evolving into law.

Risk Reporting as Part of Germany’s Auditing Standard

In Germany, businesses must follow auditing standard IDW PS340, requiring reporting of their risk register and attesting to their business’s ability to operate under a stated level of risk. Creating a risk register can be quickly and accurately accomplished with the help of risk analysis software.

“The process of determining risk-bearing capacity is now part of the risk early warning system and its review. Risk-bearing capacity is the maximum level of risk that the company can bear without jeopardizing its continued existence,” said Steffen Freytag in the Rödl & Partner article The Examination of the Risk Early Warning System. “It depends, among other things, on the economic situation of the company, its size and its ability to raise capital. When determining the risk-bearing capacity, it is taken into account that developments that could endanger the existence of the company can be based on the economic situation or on regulatory and business circumstances.”

Conducting risk analysis on balance sheets and income statements to clearly demonstrate business continuity is a critical part of financial planning that can both prepare businesses to weather potential storms and provide customers with a safe port of call.

Start Creating Your Risk Register

To start accounting for risk in your balance sheets and income statements, download our free example model, Risk Register Effect in Business Continuity, or watch our on-demand webinar, Navigating the German IDW PS340 Regulation with @RISK. For more information on the industry-leading risk analysis software, visit the @RISK product page or request a free trial to explore the software.

In Light of the First Republic Bank, Silicon Valley Bank, and Signature Bank Crises

The recent First Republic Bank, Silicon Valley Bank, and Signature Bank crises sparked significant concern and sowed distrust in the financial system among both the banks’ customers and the general public. While bank collapses of this scale have not been seen since the 2008 financial crisis, according to The New York Times article Banking Turmoil: What We Know, the memory of the rampant fear and uncertainty from that time remains fresh.

“Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year,” said Jeanna Smialek in The New York Times article Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems. “The bank was using an incorrect model as it assessed its own risks amid rising interest rates, and spent much of 2022 under a supervisory review."

Ensuring Business Continuity Amid Crises

With the current turbulent financial climate, the decisions made by Silicon Valley Bank caused their customers to panic and instigate a bank run. Signature Bank was in a comparable situation, with close to nine-tenths of their roughly $88 billion in deposits being uninsured according to regulatory filings, and was forced to temporarily close their doors.

Following those two crises, “First Republic Bank has been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks,” according to The New York Times article Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control.

Knowing their perilous position, could Silicon Valley Bank have made different decisions to prevent or better mitigate the bank run and eventual collapse through improved risk analysis and strategic external communication?

This question is also applicable more broadly; Does an organization’s income statement and balance sheet take risk into consideration?

Whether the business’s risks are chosen (e.g., where to invest, how to communicate with stakeholders, levels of production) or out of one's control (e.g., natural disasters, policy changes, supply chain issues), it is an organization’s responsibility to ensure business continuity. With this latest bank crisis, the fluctuations in interest rates, bonds, and cryptocurrency – plus the possibility of a bank run – were the major risks at play.

By calculating the probability of each event occurring and to what extent, analysts can use Monte Carlo simulation to show the best, worst, and most-likely outcome. In this way, any organization, including Silicon Valley Bank, can use Monte Carlo simulation to accurately demonstrate their business continuity – bolstering confidence in their ability to improve their financial situation. Additionally, by calculating the possible effect of their decisions, they can optimize their policies and approaches to minimize public concern.

While linking the risk register to cash flow using risk management software is not currently widespread practice, the standard for reporting and ensuring business continuity is rising and even evolving into law.

Risk Reporting as Part of Germany’s Auditing Standard

In Germany, businesses must follow auditing standard IDW PS340, requiring reporting of their risk register and attesting to their business’s ability to operate under a stated level of risk. Creating a risk register can be quickly and accurately accomplished with the help of risk analysis software.

“The process of determining risk-bearing capacity is now part of the risk early warning system and its review. Risk-bearing capacity is the maximum level of risk that the company can bear without jeopardizing its continued existence,” said Steffen Freytag in the Rödl & Partner article The Examination of the Risk Early Warning System. “It depends, among other things, on the economic situation of the company, its size and its ability to raise capital. When determining the risk-bearing capacity, it is taken into account that developments that could endanger the existence of the company can be based on the economic situation or on regulatory and business circumstances.”

Conducting risk analysis on balance sheets and income statements to clearly demonstrate business continuity is a critical part of financial planning that can both prepare businesses to weather potential storms and provide customers with a safe port of call.

Start Creating Your Risk Register

To start accounting for risk in your balance sheets and income statements, download our free example model, Risk Register Effect in Business Continuity, or watch our on-demand webinar, Navigating the German IDW PS340 Regulation with @RISK. For more information on the industry-leading risk analysis software, visit the @RISK product page or request a free trial to explore the software.

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