Why do banks fail? Lessons learned from major events

The collapse of major financial institutions over the past two decades — from Northern Rock and Lehman Brothers during the Global Financial Crisis to Silicon Valley Bank and Credit Suisse in 2023 — demonstrates a timeless truth:

These vulnerabilities can take many forms:

• Weak governance, the lack of a Risk Appetite Framework (linked to Integrated Stress Testing and counterbalancing capacity), and ineffective oversight
• Poor risk culture
• Overreliance on wholesale funding and market liquidity
• Funding concentration and refinancing risk
• Erosion of capital position due to accelerated growth to drive revenues
• Excessive interest-rate risk exposure

As financial markets become increasingly interconnected and technology accelerates the speed of information and fund movements, the importance of robust Balance Sheet Management (BSM) has never been greater.

What some of these bank failures teach us

• Northern Rock (2007) — overreliance on wholesale funding exposed severe liquidity vulnerabilities.
• Lehman Brothers (2008) — excessive leverage amplified losses and rapidly eroded capital.
• Silicon Valley Bank (2023) — concentrated deposits, unmanaged interest-rate risk and weak liquidity management created a perfect storm.
• Credit Suisse (2023) — governance failures, weak risk culture and loss of market confidence proved fatal despite regulatory capital compliance.

The digital age

The banking landscape has fundamentally changed. Historically, bank runs unfolded over weeks. Today, digital banking, social media and instant payments mean liquidity crises can develop in hours. The rapid deposit outflows at Silicon Valley Bank demonstrated how quickly confidence can evaporate.

For financial institutions, resilience requires an integrated approach across six critical areas:

• Governance & Risk Culture
• Risk Management and Risk Appetite, informed by Integrated Stress Testing
• Funding & Liquidity Management
• Capital Management
• ALM & IRRBB
• Portfolio Risk Management

The lesson from every major banking crisis

Liquidity stress is often the symptom; weak Balance Sheet Management is, more often than not, the root cause. Institutions that successfully integrate Balance Sheet Management, Portfolio Optimisation and rating-metrics management are better prepared — they withstand stress and emerge stronger.

In today's volatile and interconnected world, effective Balance Sheet Management is essential for enhancing financial resilience, maintaining stakeholder trust and creating long-term sustainable value.

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Part of The Balance Sheet Doctor — Sterling Consulting's Building Financial Resilience series.