What the Fall of Silicon Valley Bank Says About Who's Allowed to Take Risks
/
Larry Zhou/shutterstock
In the wake of the collapse and subsequent federal takeover of Silicon Valley Bank (SVB) and Signature Bank, a familiar question comes up for us: Who is permitted to take risks?
Many people in philanthropy focus extensively on risk, analyzing which investments and grants are worth the risk, who is worth taking a risk on, and what to do when a risk doesn’t pay off.
After the collapse of SVB and Signature Bank, the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation announced they would guarantee the uninsured deposits at both banks. They took this action because they decided that the failures of the two banks were systemic risks to the financial system.
SVB took a big risk by using short-term funds to make long-term investments. It made that choice because keeping money in cash provided little to no return, whereas the bonds in which it invested did pay a return. The folks at SVB may have rolled the dice on chasing returns without prudent risk management because they believed the venture capitalists who banked with them would support them through tough times. As it turns out, their gamble did not pay off.
What we witnessed with SVB, Signature Bank and the government takeover was a display of the systemic injustices of a capitalist economy. When the banks faced the possibility of dealing with the real consequences of their actions, they were given a way out, just like in 2008. Unlike these banking institutions, communities of color are not afforded a way out of following the rules, and in many cases, the system’s rules apply punitively and disproportionately to them.
At the Kataly Foundation, we support organizations led by Black and Indigenous people, and all people of color, who build power within the communities they serve. These organizations are often the ones viewed as “risky” investments due to the ways that structural racism is embedded in our financial systems. But the irony is that they never have the opportunity to even consider the kinds of risks SVB chose to take because they are locked out of having large-scale resources and investments in the first place. There is no politician they can call, no consortium of power-holders who can threaten the federal government on their behalf, and no Twitter rant that gets their voice heard.
Community loan funds and community-owned and governed projects that have never lost a penny, keep adequate reserves, and manage their assets and liabilities to avoid a mismatch, often face the critique that they lack the expertise to manage large sums of money. This is in part due to the fact that these same communities and organizations have been intentionally historically underresourced by philanthropy, banks and other financial institutions.
In the case of SVB, on the other hand, venture-capitalist-backed organizations left billions in uninsured deposits at the bank. They had the resources for and access to the best chief financial officers, chief investment officers, attorneys, financial managers and financial advisors, and they still fell down at the first hurdle. The irony of people of color being told they need more financial education by wealth holders who repeat the same failures over and over again is not lost on us.
As philanthropy considers what risks to take and what constitutes a risk in the first place, we at Kataly offer two questions that help us in our own risk analysis: What is the risk to the community (those that stand to be most directly impacted) if the project doesn’t happen? And does this initiative have community support, buy-in and engagement, which we identify as the greatest risk mitigant to a project or loan?
The failure of SVB clearly illustrates what happens when an institution or organization does not have the support of its community. The venture capitalists who told their portfolio companies to withdraw funds from SVB, essentially collapsing the bank, were unconcerned about the other companies, employees and families who would be impacted. A community risk assessment approach would have shown that supporting SVB with time and patience to get through a challenging period would have been the best outcome for everyone with a stake in the situation. But when the system is driven by hyper-individualism and capitalism, the prosperity and well-being of the collective is cast aside for the benefit of the few.
When poor or rural communities or communities of color face disaster and crisis, like in Flint, Michigan; Atlanta, Georgia; or East Palestine, Ohio, it is grassroots mutual aid networks and people-of-color-led organizations that step in to provide care and support. Unlike SVB and Signature Bank, communities of color cannot count on the government to come through for them in tough times, as it has failed to do time and time again. And it is these very organizations — organizations that are not permitted the opportunity to manage risk, take a chance or engage in an experiment — that pay the biggest price for the actions of people and institutions who take risks and fail again and again.
When economic uncertainty arises, people with wealth retreat to narratives based in scarcity and fear that materialize in austerity measures for those who require the most support. During the financial crisis of 2008, smaller banks in communities of color were viewed as riskier places to hold assets, and deposits flowed to the large institutions that were responsible for the recession. Investment managers and financial advisors recommended that wealth holders and foundations reduce their grantmaking and make “surer bets,” which equated to resourcing large, mainstream, white-led organizations. Meanwhile, grassroots, people-of-color-led organizations continued to win victories that benefit all of us and led with steadfast persistence, bold visions and moral clarity. Yet these groups were seen as the risk, rather than the banks, investment firms and financial institutions that failed and have been bailed out time and time again.
History is on the verge of repeating itself. Since the collapse of SVB and Signature Bank, billions have flowed to institutions like Bank of America. These are banks that fund developments that put our communities at significantly increased risk, like Cop City in Atlanta. As we well know, these larger financial institutions are not accountable to communities of color or less-resourced communities.
But this is a moment when philanthropy can choose not to repeat past mistakes. Foundations and individual donors have billions of dollars, and we wield influence over investment firms and funds. The institutions that we select to manage and store our assets can reflect our social justice values.
Rather than retreat to what is familiar, funders can take bold, decisive action to support social movements and community institutions at scale. At Kataly, we are examining how to employ a community-based investment strategy rooted in justice. Instead of depositing resources in a banking system that fails us, funders can send resources to the credit unions and community banks that serve, and are accountable to, their communities.
Over the past year, some of our grantees have shared they are facing a reduction in support from foundations because of the financial downturn. While economic turmoil may financially impact philanthropy, the impact to organizations on the ground is far greater and the stakes are much higher. Now more than ever, social movement groups need resources to build power and continue to organize so that they can push back against a system that is designed not to see or hear them. This is a moment for abundance rather than scarcity. Philanthropy can rethink its relationship to risk and recognize that the real risk is making the same choices over and over again and expecting a different outcome. If we bet big on grassroots, people-of-color-led groups and community-led institutions, the payoff will benefit all of us.
Lynne Hoey is the Chief Investment Officer at the Kataly Foundation, with more than 15 years of experience working in the fields of accounting, banking and impact investing.
