Class Learning Reflections (3)

Corporate Financial Accounting, CFA

We are delving more into drawing insights from various components of financial statements because we are now expressing the components in percentages to be able to know which areas an organisation is doing well or not.

Such insights are helping us to develop perspectives and strategies on possible course of action as a management staff, an investor, human resources personnel, marketing staff, employees, depositors and in some cases, we weigh the possible way to deal with external stakeholders like the regulators such as the Central Bank of Nigeria, National Deposit Insurance Commission, Securities and Exchange Commission and other public institutions that have been saddled with the responsibilities of protecting the consumers and investors interest.

Silicon Valley Bank, SVB and Credit Suisse Collapse

We read up and discussed intermittently the failure of Silicon Valley Bank and Credit Suisse, the major shockwaves in the financial sector globally in March.

The Silicon Valley Bank, SVB became the second largest bank in the history of the United States to have failed and the largest collapse of any banking institution in the country since the 2008-2019 global financial crisis.

The 16^th largest bank in the U.S. by assets worth $ 209 billion until its collapse due to a bank run served mostly organisations and individuals dealing in technology. It was responsible for almost 50% of venture capital-backed technology and healthcare companies in the U.S. like Airbnb, Cisco, Pinterest, Fitbit and blocked Inc. was financed by the Bank.

The bank enjoyed a surge in revenue during the Covid-19 era which accelerated digitisation helping the bank to invest more in technology and high-risk businesses.

The collapse of the bank was due to miscalculated investment decisions made by the management. They invested the deposits in long-term treasury bonds hoping to get a higher return on investment than they could have got investing in short-term bonds with insuring the investment again risks such as rising inflation. Unfortunately, the efforts of the Federal Reserve in combatting the inflation surge the world has been experiencing due to the aftermath of Covid-19 by raising the interest rates made the majority of SVB’s investment fall in market value and became less attractive.

The SVB collapse affected some Nigerian startup companies headquartered in Silicon Valley but thank goodness that the regulators rose to the occasion to rescue the consumers.  

Similarly, Credit Suisse, the second largest financial institution in Switzerland also collapsed in mid-March 2023 due to liquidity problems. The failure of the Bank was attributed to the collapse of its two investment funds in Archegos and Greensill Capital, top management shift, various scandals it faced in recent years and inconsistent strategy. The distressed bank has been bought over by its arch-rival UBS.

Union Bank Financial Statements for the year ended December 31, 2010

The review of the bank’s balance sheet, income statement, statement of financial position and statement of change in owners equity showed that the bank was holding more liabilities at 73.7% than owners equities at 26.3% leading to an unbalanced asset base.

The assets of the bank were majorly derived from liabilities especially the risk funds and interest-bearing liabilities. Also, the asset mix skewed more towards investment securities that gave short-term and lower returns rather than loans and advances that came with multiplier effects.

Since the bank’s owners equity was a negative value, it fell short of the capitalization standard of the CBN needed for a bank to avert insolvency and continue to run businesses. We had to come up with the following strategies to balance its sheet, assure the minimum capitalization standards of N25 billion and smooth running of the bank;

1. The bank needed to engage its high-net-worth depositors to agree to a plan that would ensure the safety of part of their deposits such as capital reduction
2. Develop a sound business plan to convince the regulators and the investors of their abilities to turn the tide.
3. Stagger withdrawal by its high-net-worth depositors over a period of time.