March 13, 2023. In less than a week, the financial markets were rocked with news regarding the sudden failure of Silicon Valley Bank (SVB) - an institution that controlled more than $200 billion in assets including the who’s who of venture-capital backed companies in the US and abroad.
From the public’s eye, many of us watched the bank's failure play out over a remarkable 48-hour span. Undoubtedly, there was a series of missteps leading to second largest bank failure in U.S. History ----leaving many scratching their heads into what (or who) is next to be exposed.
The bank, following a liquidity crunch from a forced fire sale of assets at a heavy loss, attempted to raise $2.25 billion in capital to satisfy its negative balance sheet. Its exposed financial position prompted many of its prominent VC fund clients to recommend its portfolio companies to pull money out the bank –inciting a systemwide panic.
In swift action, the move fueled $42 billion of withdrawals "bank run" before the institution could secure a loan to cover its liquidity obligations – an event which prompted immediate action of takeover from the Federal Deposit Insurance Corporation (FDIC).
As seen with the failure of crypto exchange FTX, a sudden closure of an institution holding investor assets brings risk, custody, insurance, and liquidity to the forefront of conversation while exposed institutions begin to assess its collateral damage.
Most importantly, these events present a good opportunity for firms to evaluate the practices of institutions holding custody of client assets--- banking, brokerage, prime brokerage, custodians, trustees, and other financial service vendors who hold custody of assets.
A few things to review in your firm due diligence program can include:
- Insurance - FDIC, SIPC, E&O, Cybersecurity
- Risk Disclosures
- Liquidity Coverage Ratio (LCR) -- banking/brokerage
- Audit Practices/Reports
- Business Continuity practices
- Custody
The following is not necessarily a comprehensive list but feel free to contact us for more thoughts on the evaluation of vendors who hold firm assets.