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SVB collapse sets off underwriting-risk alarm

Silicon Valley Bank’s 2023 collapse continues to raise concerns in the echo chambers of the banking sector over slack lending practices and underwriting oversight, prompting a reevaluation of risk management strategies around macroeconomic influences

February 13, 2024 | Jayarethanam Pillai
  • Slack underwriting, lending, financial oversight
  • Credit risk and underwriting concerns in banking
  • Diversifying funding for startups and venture capital firms

Silicon Valley Bank’s (SVB) collapse, the third-largest in US history, revealed a $20 billion impact on Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund, exposing vulnerabilities in underwriting compliance and financial oversight across the industry.

SVB was a key financial institution in Silicon Valley that provided customised financial services to startups, venture capital firms, and other technology-focused businesses. Its reputation as an early adopter of new technologies allowed it to stay ahead of the curve and better serve its customers. Despite its strengths, its sudden death has left many wondering how the ecosystem will be affected and what the future holds for the banking industry. 

Slack underwriting, lending, financial oversight

The collapse happened for multiple reasons, including a lack of diversification, overextending its loan initiatives, weak macro indicators, and a classic bank run, where many customers withdrew their deposits simultaneously based on fear of the bank’s solvency. What has become clear in hindsight is that banks are failing to undertake strict underwriting compliance, leading to slack lending activities and a clear lack of financial oversight.

Negative consequences of adverse macroeconomic events are not limited to the banking sector. Banks’ underwriting activities play a special role in the economy, and their failure markedly reinforces the adverse developments that may have caused them to fail. Given that banks’ underwriting models are more prone to risk-taking than those of non-financial institutions, and ...

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Keywords:Credit Risk, Underwriting, Financial Ecosystem, Diversification, Startups, Venture Capital, Macro Indicators, Exchange Rates, Trade, Interest Rates, Inflation