Silicon Valley Bank is one of the most prominent financial institutions in the tech industry, providing banking services to startups and venture capitalists. Recently, the bank experienced a security incident that affected its clients’ sensitive information. This incident has raised concerns among Silicon Valley Bank’s customers and other businesses alike.

We will examine the key takeaways from the Silicon Valley Bank collapse and provide insights on how businesses can better protect their data. Whether you are a startup, investor, or any other stakeholder in the tech industry, it is crucial to understand what happened at Silicon Valley Bank and how to prevent similar incidents from occurring in your organization.

Let’s dive into what we know about this event so we can learn from it.

Silicon Valley Bank Incident Is Not an Indicator of Widespread Financial Collapse

Whether you are serving credit union members in the California markets, have clients who finance tech startups, or don’t have anything in common with SVB, your members may still be concerned.

So, we first want to look at the core issue behind the Silicon Valley Bank incident. By many accounts like this one from the Kenan Institute of Private Enterprise, SVB suffered from mismanagement of its balance sheet.

The Silicon Valley Bank assets were long-term in nature but their liabilities were mostly short-term in the form of demand deposits, which isn’t wholly unusual for financial institutions. But the nature of their business – having served mostly tech startups – meant that their assets were more sensitive to interest rate changes. And we saw some record-breaking interest rate changes in 2022.

SVB was operating with a larger-than-normal amount if uninsured deposits and, when hit with an unexpectedly high volume of withdrawals from these uninsured depositors in less than 24 hours, more than 90% of the bank’s total deposit base became a liability that was coming due immediately, so to speak.

There were several ways to mitigate these fluctuations, and in fact, most well-managed financial institutions (like yours) do just that. But because the nature of banking is often hard for your members to conceptualize – and personal finances alone are difficult to manage without proper education – you may have noticed your teams encountering more members with worries about the safety of their assets.

Because of that, we want to share some of the biggest takeaways banks and credit unions can glean from the SVB fallout.

Focus on Difference Messaging

The Credit Union Times recently shared an article about how CUs can re-educate members on some of the biggest differences between banks and credit unions.

Credit unions should share insights about how they accept deposits, and then nearly always turn around and reinvest those funds into local communities.

Leaning heavily into the non-profit nature of credit unions versus private banking services can help bridge the trust gap that has been created for banking members all over the United States. It’s important right now to instruct your front-facing staff members to take their time to reassure your members that their funds are safe.

Credit unions are, at their core, agents of growth and financial wellness for their members and the larger communities that they serve – sharing the regulatory and insurance-related protections your CU has in place will help members maintain peace of mind knowing their funds are safe, no matter what happens.

Warnings about Cryptocurrency from NCUA Were Warranted

Many professionals within the American banking system and industry had strong opinions about the NCUA and its recommendations for a cautious approach when it comes to cryptocurrency.

As a new form of trending currency as well as financial and investment opportunities, SVB worked closely among startups and crypto enthusiasts. While this in and of itself isn’t inherently incorrect, it’s also a big leap to endorse new assets and banking trends, especially since economic stability since the onset of the COVID-19 pandemic has been harder to predict.

Single-Sector Business Isn’t Dooming Any FIs

Yes, part of the problem with SVB was the lack of diverse business – it was a bank that catered to a specific market and industry. But you may be thinking, “Aren’t there many instances of banks and credit unions keeping their business concentrated on a specific industry or region?” and yes, there are.

So it’s important to note that SVB was concentrated in such a way that it only did business in highly volatile markets. It catered mostly to venture capital-backed startups in tech and healthcare, and only in the Northern region of California.

Similarly, the behavior of SVB’s clients differs from the average banking member base in America. SVB’s deposits often far outweighed the demand for loans, and that was coupled with the bank’s tendency to invest in securities with long-dated maturities. Then, when interest rates rose, these long-term bonds lost much of their value.

Essentially, their narrow focus, coupled with economic factors and underestimation of their need for liquid assets is what created a perfect firestorm for Silicon Valley Bank.

So how do you communicate this into a solid strategy for helping your credit union members? Remember that regulations and compliance with governing bodies is the bare minimum. You can always put extra precautions in place, especially in this post-COVID landscape.

Diversification in the industries your CU serves isn’t a cure-all for preventing bank failure. It is most certainly something to keep an eye on, but with strong financial management practices in place, you can communicate to your members that their funds are not in danger of disappearing with a simple economic shift or downturn.

Reliability and Trust are Indispensable

Bank and credit union members are looking for safety in the wake of SVB and other financial uncertainties. And if they can’t trust your financial institution to help them weather a crisis because you are the one creating that crisis for them, you may never be able to recover that trust once it’s lost.

Credit unions already have a leg up on big banks when it comes to providing a satisfying member experience. And your member experience should always be coupled with top-tier backend programs and protocols.

That’s why IMS offers IaaS (Infrastructure-as-a-Service) to help you reduce expenses by eliminating the cost and headache that comes with setting up and managing your own on-site data center.

Our IaaS offering is enterprise-grade and cloud-based, built to meet the needs of your organization as it grows and changes.