SVB collapse & FRM curriculum

[enjofaes]

I asked ChatGPT with the browsing function to connect SVB with the GARP curriculum: pretty basic I guess


The SVB collapse in 2023 can be connected to various topics covered in the Financial Risk Manager (FRM) Part I and Part II by the Global Association of Risk Professionals (GARP). Here's how:

FRM Part I:​

1. Quantitative Analysis: The collapse was due in part to SVB's decision to increase its holdings of long-term securities seeking higher returns, and accounting for them on a hold-to-maturity basis. The market value of these bonds decreased significantly as the Federal Reserve raised interest rates, causing unrealized losses on the portfolio. Quantitative analysis skills would be needed to evaluate and model these types of risks and understand their potential impacts.
2. Financial Markets and Products: The SVB collapse was a major event in the financial markets, affecting many startup companies and other businesses in the U.S. and abroad. This topic area includes understanding the characteristics, valuation, and risks of various types of financial products and markets, which is central to understanding events like this.
3. Valuation and Risk Models: SVB faced a bank run, which is a classic risk for banks and other financial institutions. Understanding and being able to model this kind of risk is crucial.
4. Risk Management and Investment Management: The bank's risk management strategies were clearly inadequate, leading to its eventual failure. On the investment management side, the bank's decision to invest heavily in long-term securities played a role in its collapse.

FRM Part II:​

1. Market Risk Measurement and Management: This area includes the measurement and management of risks like those that SVB faced, including interest rate risk (due to Federal Reserve's actions) and market risk (due to changes in the value of the bank's long-term securities).
2. Operational and Integrated Risk Management: The collapse of SVB could have been influenced by operational risks, such as the risk of inadequate or failed internal processes, people, and systems, or from external events.
3. Credit Risk Measurement and Management: SVB's collapse also has implications for credit risk, particularly as it relates to the bank's lending practices and the potential for defaults on loans by its clients.
4. Risk Management and Investment Management: This topic area includes investment management and corporate finance, both of which are relevant to understanding the SVB collapse. The bank's investment strategies, including its decision to increase its holdings of long-term securities, were central to its collapse.
5. Current Issues in Financial Markets: The SVB collapse is a current issue that is impacting financial markets. Understanding such events is crucial for risk managers to anticipate potential risks and manage them effectively.
6. Liquidity and Treasury Risk Measurement and Management: The bank run and subsequent liquidity crisis that led to the collapse of SVB is a classic example of liquidity risk, one of the key topics in this area.

This analysis is based on the information available up to September 2021. For the most current and detailed analysis, further research is necessary, including recent advancements and updates in the field of Financial Risk Management that may have occurred after the last training cut-off

 

[enjofaes]

I asked to go 1 step further:
Of course, let's break down the SVB collapse with respect to specific subtopics under each main topic area of the FRM Part I and II curriculum.

FRM Part I:​

Quantitative Analysis

• Probability and Statistics: The significant decrease in the market value of SVB's long-term securities could be analyzed using statistical tools such as distribution analysis and hypothesis testing to understand the likelihood of such an event.
• Regression and Time Series Analysis: The bank's securities portfolio could have been monitored and forecasted using time series analysis to identify trends and cycles.

Foundations of Risk Management

• Risk Management Failures: The SVB collapse itself can be studied as a case of risk management failure. The bank's risk assessment and mitigation measures were inadequate, leading to its downfall.

Financial Markets and Products

• Fixed Income Securities: SVB increased its holdings of long-term securities, which are types of fixed income securities. Their values decreased significantly due to rising interest rates, leading to large unrealized losses.
• Derivatives Markets and Instruments: If SVB had used derivative instruments as a part of their risk management strategy, they could have potentially hedged against some of the risks that led to their collapse.

Valuation and Risk Models

• Market Risk Models: The bank could have used market risk models to better predict and manage the risks associated with its investment in long-term securities.
• Credit Risk Models: Given SVB's role as a major lender to tech companies and startups, credit risk models are highly relevant to assess the risk of borrower default.

FRM Part II:​

Market Risk Measurement and Management

• Interest Rate Risk Measurement and Management: The Federal Reserve's decision to raise interest rates led to a drop in the market value of SVB's long-term securities. Interest rate risk models could be used to quantify this risk.
• Equity, Currency, and Commodity Risk: The bank's position in various markets could have exposed it to these risks.

Operational and Integrated Risk Management

• Operational Risk: Failures in internal processes, personnel, or systems at SVB could have contributed to its collapse. The bank run and the subsequent inability to meet depositor demands is an example of operational risk.

Credit Risk Measurement and Management

• Default Risk: Given the bank's role in financing high-risk new companies, it was exposed to significant default risk. Understanding and managing this risk is crucial.

Risk Management and Investment Management

• Portfolio Construction: The bank's decision to heavily invest in long-term securities and the consequent unrealized losses highlight the importance of effective portfolio construction.
• Risk Management Techniques for VaR Models and Expected Shortfall Models: These techniques could have been used to better assess and manage the bank's risk exposure.

Current Issues in Financial Markets

• Recent Financial and Regulatory Developments: The SVB collapse is a recent financial development that could lead to changes in regulatory practices, particularly around risk management and deposit insurance.

Liquidity and Treasury Risk Measurement and Management

• Cash Flow and Liquidity Risk: The bank's inability to meet depositor demands during the bank run is a clear example of liquidity risk.

Again, these connections are based on the information available up to September 2021. For the most current and detailed analysis, further research is necessary123.

 

[enjofaes]

I guess it mentions the cut-off based on the info chatGPT has about the FRM curriculum. But any other further insights are always welcome @David Harper CFA FRM

 

[gsarm1987]

I asked to go 1 step further:
Of course, let's break down the SVB collapse with respect to specific subtopics under each main topic area of the FRM Part I and II curriculum.

FRM Part I:​

Quantitative Analysis

• Probability and Statistics: The significant decrease in the market value of SVB's long-term securities could be analyzed using statistical tools such as distribution analysis and hypothesis testing to understand the likelihood of such an event.
• Regression and Time Series Analysis: The bank's securities portfolio could have been monitored and forecasted using time series analysis to identify trends and cycles.

Foundations of Risk Management

• Risk Management Failures: The SVB collapse itself can be studied as a case of risk management failure. The bank's risk assessment and mitigation measures were inadequate, leading to its downfall.

Financial Markets and Products

• Fixed Income Securities: SVB increased its holdings of long-term securities, which are types of fixed income securities. Their values decreased significantly due to rising interest rates, leading to large unrealized losses.
• Derivatives Markets and Instruments: If SVB had used derivative instruments as a part of their risk management strategy, they could have potentially hedged against some of the risks that led to their collapse.

Valuation and Risk Models

• Market Risk Models: The bank could have used market risk models to better predict and manage the risks associated with its investment in long-term securities.
• Credit Risk Models: Given SVB's role as a major lender to tech companies and startups, credit risk models are highly relevant to assess the risk of borrower default.

FRM Part II:​

Market Risk Measurement and Management

• Interest Rate Risk Measurement and Management: The Federal Reserve's decision to raise interest rates led to a drop in the market value of SVB's long-term securities. Interest rate risk models could be used to quantify this risk.
• Equity, Currency, and Commodity Risk: The bank's position in various markets could have exposed it to these risks.

Operational and Integrated Risk Management

• Operational Risk: Failures in internal processes, personnel, or systems at SVB could have contributed to its collapse. The bank run and the subsequent inability to meet depositor demands is an example of operational risk.

Credit Risk Measurement and Management

• Default Risk: Given the bank's role in financing high-risk new companies, it was exposed to significant default risk. Understanding and managing this risk is crucial.

Risk Management and Investment Management

• Portfolio Construction: The bank's decision to heavily invest in long-term securities and the consequent unrealized losses highlight the importance of effective portfolio construction.
• Risk Management Techniques for VaR Models and Expected Shortfall Models: These techniques could have been used to better assess and manage the bank's risk exposure.

Current Issues in Financial Markets

• Recent Financial and Regulatory Developments: The SVB collapse is a recent financial development that could lead to changes in regulatory practices, particularly around risk management and deposit insurance.

Liquidity and Treasury Risk Measurement and Management

• Cash Flow and Liquidity Risk: The bank's inability to meet depositor demands during the bank run is a clear example of liquidity risk.

Again, these connections are based on the information available up to September 2021. For the most current and detailed analysis, further research is necessary123.

The big one here is Operational risk: lack of controls. Its like a disease and the rest others are symptoms of it. very typical of bank failures, nothing new i mean. If i were the regulator, i would have strictly checked management's behaviour and psyche. usually its an ego of few at the top