Reflections on the SVB Collapse from the World’s First CRO

For Part II of our look at the Silicon Valley Bank collapse one year on, we reached out to James Lam. The former Fidelity Investments and GE Capital Markets CRO, who is recognized as the first to use the term “chief risk officer” (and serve as one), wrote a Harvard Business Review article after the SVB failure on what went wrong and what could be improved. He followed that up with an RMA Journal piece on managing the confluence of emerging and traditional risks. Here’s what’s on his mind now. (Lam’s comments below have been edited for length.)  

We are not out of the woods. Regional banks face significant issues today, including unrealized investment losses, undiversified commercial real estate exposures, higher deposit costs, and shrinking deposits, Lam said. To prepare for a combination of stress scenarios including CRE delinquencies, deposit drawdowns, and net interest margin declines, banks can: ensure they have sufficient liquidity and capital, rationalize their expenses, selectively sell assets, and reduce their enterprise risk profiles.

Banks and regulators learned important lessons. Banks beefed up their risk management, compliance, and internal audit resources, Lam said. And regulators proposed heightened risk management and stress-testing standards, as well as more stringent capital requirements. 

More work is necessary. Many banks define enterprise risk management (ERM) narrowly as a department or function. They would benefit, Lam said, by expanding their definition of ERM to an organizational capability spanning from board risk oversight to front-line risk management. While banks have increased their resources at the ERM department level, they have not made enough progress in strengthening board risk oversight, including the appointment of risk experts as directors, Lam said. They also need to strengthen risk culture, implement dynamic risk appetite statements, and integrate risk into business and operational decisions.

We are in this together. While the proposed regulatory changes to risk management standards and capital frameworks are well intentioned, there is always a significant lag between regulatory policies and improved supervisory practices. Bank regulators should evaluate their regulatory and supervisory methods to drive needed changes in the banking industry that are both appropriate and pragmatic. Everyone has to do their part, Lam said, because mismanagement of risk at a few banks can lead to contagion problems for the entire industry.  

More from James Lam: Read his recent RMA Journal article, “Bank Risk Management in the Age of Disruption,” and watch for his related RMA Risk Readiness Webcast this spring.