Global risk management failures that had seismic impact
1. The Global Financial Crisis – 2008
The global financial crisis of 2008 is known as one of the worst risk management failures in history. The crisis was fueled by the widespread use of subprime mortgages, which were given to borrowers with poor credit scores. People who did not have the capability to make payments on their mortgages defaulted, leading to huge losses for banks, investment firms, and taxpayers. Many financial institutions failed, leading to a global recession.
2. Barings Bank Collapse – 1995
Barings Bank, one of the oldest banks in Britain, collapsed in 1995, largely due to a single rogue trader named Nick Leeson. Leeson made unauthorized trades on Japanese stock index futures that ended up losing the bank £827 million. The failure of risk management allowed Leeson to continue his trading activities, and the bank suffered a catastrophic loss.
3. Long-Term Capital Management (LTCM) – 1998
Long-Term Capital Management, a hedge fund managed by Nobel Prize-winning economists, collapsed spectacularly in 1998. The fund had made huge bets on various financial instruments, and when these bets went wrong, they suffered huge losses. The fund’s collapse threatened to destabilize the entire financial system, leading to a government-led bailout that cost taxpayers billions of dollars.
4. Enron – 2001
Enron, once one of America’s most prominent energy companies, collapsed in 2001 due to accounting fraud and unethical practices. The company had inflated its profits through creative accounting techniques, hiding huge debts from investors and regulators. Risk management failures allowed the company to continue these practices, leading to its eventual downfall.
5. MF Global – 2011
MF Global, a global commodities brokerage firm, filed for bankruptcy in 2011 due to risky trades made by CEO Jon Corzine. Corzine had taken a massive bet on European sovereign debt, which turned out to be a massive failure. The company’s risk management systems were not robust enough, leading to huge losses and ultimately the company’s collapse.
6. Silicon Valley Bank-2023
Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The bank invested a large portion of the deposits, in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.
But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.
If SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back. However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank’s customers started drawing on their deposits.
SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors and customers.
It took just 48 hours between the time it disclosed that it had sold the assets and its collapse.
Source: Silicon Valley Bank: why did it collapse and is this the start of a banking crisis? | Banking | The Guardian
7. Credit Suisse - 2023
In March, Switzerland’s financial services watchdog, FINMA concluded that the bank had “seriously breached” its risk management obligations following the collapse of Greensill Capital in 2021. With Archegos, the basic failure was simple: profitability from the relationship was low (tens of millions of dollars at most over several years), yet the risk exposure was reportedly more than $20bn, or half the bank’s equity cushion against potential losses, and it only held a tenth of that against the position. It shouldn’t need an RCSA to spot that. And how far up the material risk list was a $5bn loss in prime brokerage anyway? Upheavals are always the result of large surprises that, by definition, are not flagged early by risk and control systems.
Source: Credit Suisse: a failure of regulatory culture – OMFIF