If so, we'd love to hear it!
Simply click the link below and submit any ideas that you have for us to talk about on future Wheel of Risk episodes!
If so, we'd love to hear it!
Simply click the link below and submit any ideas that you have for us to talk about on future Wheel of Risk episodes!
Alix McCabe: It is one of the more spectacular and unsettling situations we've ever seen in the US banking sector.
Announcer: It's not every day that we have a bank failure.
Announcer: Silicon Valley Bank's collapse set off a panic.
Announcer: What happened here with the SVB?
Announcer: The anatomy of a collapse. How much could this spread?
Announcer: Investors in the banks will not be protected. They knowingly took a risk. And when the risk didn't pay off, investors lose their money. That's how capitalism works.
Alix McCabe: The drama surrounding SVB sent a shockwave through the financial world and beyond, spotlighting the fragility of the banking system and earning itself a place on
Audience: Wheel of Risk.
Alix McCabe: Hi, and welcome to season two of Wheel of Risk, proudly presented by Allianz Trade. I'm your host, Alix McCabe. On every episode, we spin the wheel, land on a new worry, and then tackle it head on by bringing you expert insights and advice to help you keep your business solvent, secure, and well ahead of the competition. Joining me today for our season premiere episode is someone you may remember from season one. Justin Seedorf is Southwest Regional Vice President here at Allianz Trade Americas. Justin, welcome back to the podcast.
Justin Seedorf: Thanks, Alix. It's good to be back.
Alix McCabe: You're officially a regular now on Wheel of Risk.
Justin Seedorf: I know.
Alix McCabe: Add it to your CV. Are you ready to give the wheel a spin? Hopefully it is not too rusty from sitting in storage for six months.
Justin Seedorf: Yep, I've been stretching all morning.
Alix McCabe: All right, let's give it a spin. Here we go.
Justin Seedorf: Here we go.
Alix McCabe: Oh, wow. You've landed on breakout the bailing bucket. A look at the fallout from the failure of Silicon Valley Bank.
Justin Seedorf: Ooh, that's a good one.
Alix McCabe: There's lots to discuss. So let's dive on in. The collapse of SVB was actually one of three bank failures in March of 2023 and the third- largest failure in US history. So how did it happen? Let's start with a quick primer from our senior economist for North America here at Allianz Trade, Dan North.
Dan North: Silicon Valley Bank, to put it very simply, ran out of money. It had depositors that were pulling money out, had been withdrawing money for some time, and to cover those deposits, SVB had to liquidate some of their assets. Some of their assets were long- term bonds, so they get a little extra interest on them. Well, guess what happens in an increasing interest rate environment? Value of those bonds falls and they lost $ 1. 8 billion on the sale of those bonds because again, the value had fallen.
Well, then the CEO comes out, I think on a Wednesday morning, and says, " Hey, guess what? We need to raise $ 2 billion of capital." And if you're a depositor in the bank, it's like, what? You just told me the bank is failing. I got to get my deposits out. Well, this is a bank run, and it's different than the way it used to be. In an old bank run, you stood outside the bank and hoped to get it in time to get your money out. Here, the bank run was done instantly on a phone. So that led to the collapse. And by the way, there were regulators in there a year beforehand who said, this asset's out here, these long- term bonds, kind of risky. You might want to think about taking care of that.
Alix McCabe: So Justin, there's a lot to unpack here. I wonder maybe if you could begin by talking about the cracks that this situation exposed in the banking system. What are the risk factors that were brought to light here in your mind?
Justin Seedorf: Yeah, I mean there definitely is a lot to unpack and I think Dan gives a pretty good synopsis. But just to level set, we need to understand that banks have become a fundamental part of almost every company's strategy for cashflow, for operational expenses and growth. Companies rely on the lending from banks in order to accomplish all of those things. And the banks, they make a profit by the interest on that lending. Now, this may sound like a bit of an oversimplification, but banks need to have access to the money to lend out so they can make a profit. Now, the way they primarily access that capital, it's going to be through these deposits that you heard Dan referencing. So obviously when the people and the companies that have deposited their money in to those banks start to pull it out, the banks have less money to lend.
But also when those banks make bad loans or loans that don't perform because the borrower defaults or goes bankrupt, it also impacts that bank's ability to loan money. Because of all of this, there's been some protective measures banks take to make sure they have enough liquidity, historically speaking. They need to have enough money on hand to allow them to keep operating even when some of those loans go bad. So I think a big crack that was actually exposed here was that there hasn't been enough across the board enforcement of some of those guidelines by the regulatory authorities. I mean, you even heard Dan reference regulators were in there at SVB a year before and were kind of pointing out some of the risky assets they had and risky strategies they had. But nothing was really done to enforce some more, I guess, sound guidelines.
After 2008, the Global Banking Committee, it's called The Basel Committee on Banking Supervision, they created certain guidelines to make sure that the banks were keeping enough capital on hand, they were adhering to more sound strategies. And I think what really got exposed here is there just hasn't been enough enforcement of those guidelines that have been established. They've been really enforced at the top level of the banking sector. So think like your biggest banks in the world, they have to adhere to and do a pretty good job of adhering to those Basel three guidelines. And mainly in part because the regulators make sure of it, but they've kind of been lax on the lower end banks, partly because they are fairly restrictive and it requires these smaller banks to reserve a level of capital that just quite frankly makes it harder for them to be competitive from a lending environment. So because of the restrictive nature of it, it actually costs these banks more money, which they have to then pass on to their customers.
And so the regulators said, you know what? If you're below a certain threshold, you don't have to really adhere to these specific guidelines. They do have their own guidelines they have to adhere to, but not these Basel three ones. And I think what has happened, and what we're going to see now after the SVB and several other failures, is the regulators are really going to push further down into the lower echelon of the banking sector. And what that's going to do, Alix, is it's going to require that these smaller banks now reserve more capital, which means it's less money they can loan out. And so they're going to have to be selective about who they loan their money to. So the riskier companies that maybe are currently clients of theirs, they're going to have to look at them and say, " Hey, we basically can't afford to keep lending you money. You no longer fit our demographic, our profile." So we're going to see a lot of companies lose access and it's going to impact their ability to operate.
Alix McCabe: That brings up a good point. Say you're a business owner, okay, how can you as a business owner continue to sell to all of your customers with a high level of confidence knowing that some of them are going to lose their funding from their banks? Like you just said.
Justin Seedorf: If I had a crystal ball, it would be a lot easier to answer this question. But I think there are some practical things you can do. I mean, let's just say you're a food distribution company, you have a hundred customers. You probably got 10 big ones, maybe five big customers that they're well established companies, they've been around for a long time, and they probably purchase a good amount of product from you. But then you've got a whole bunch of customers in your portfolio that you just don't really know that well, maybe they're a brand new customer and they're wanting to purchase from you, and you're trying to figure out, how do I know that they're going to pay me? Because the last thing a business owner wants to do is partner with customers that A are going to end up defaulting and B aren't going to be good future customers.
So these business owners really need to leverage a lot of different tools to make sure that they're partnering with the right customers and that they're protected in the event that their current customers aren't able to continue to access the working capital they need. I think one of the best places to start is to look at your current portfolio of customers and really do a deep dive and understand what do you really know about them. Most business owners, when a new customer comes to them, they do some sort of due diligence like a credit app or a banks and trades reference check. But after that, once that customer starts purchasing from them and even growing with them, they probably don't do a whole lot of due diligence in just making sure that that customer has continued to be a credit worthy customer at the level they're operating at.
Alix McCabe: So in this new reality, this new current regulatory environment, what is the role of trade credit insurance?
Justin Seedorf: Trade credit insurance, when people hear that, they think it's just an insurance product, right? It's like my homeowner's insurance or my product liability insurance. You get a policy, you put it in a drawer, you wait for something bad to happen and then you file a claim. But what's unique, especially with Allianz Trade, is we really leverage a whole lot of data that we've collected over our 130 plus years of doing business. But then we also are utilizing artificial intelligence and machine learning to do real- time monitoring of every company in our
database. And what we're monitoring is their ability to pay their bills. We're monitoring their liquidity position or monitoring how they actually are paying their current suppliers. And so trade credit insurance, especially with Allianz, can allow our clients to do that real- time monitoring of their customers and understand what's going to be the impact of their customers' inability to pay them.
Alix McCabe: So a little earlier we heard from Dan North, our senior economist for North America on what caused the collapse of Silicon Valley Bank in the first place. And I'd like to bring Dan back now to answer another question for us, which is whether or not we're going to continue to see ripple effects from this situation in the longterm.
Dan North: I think answer is yes, because inflation is cumulative. So since the beginning of 2021, prices in general have gone up about 17%, but wages have only gone up about 12%. So wage earners are still 5% underwater, and they have been underwater for a couple of years now. And this of course erodes purchasing power and it's really a societal problem. So it's something that the Fed has had to address aggressively, but it will eventually work out. Inflation will start to slow down and wages will start to catch up. That's going to take a while. Now, this also relates to Silicon Valley Bank because of the cure to inflation is raising interest rates. And when you raise rates, banks like Silicon Valley Bank and the rest of the banks now are saying, " Hey, wait a minute, we have now got to be really careful with the loans we're going to make." It's going to make it that much harder for small and medium businesses to get credit. And that could be a real crimp, not only small and medium businesses, but I think also the economy in general.
Alix McCabe: So Justin, given the ongoing uncertainty, how could a partnership with Allianz Trade help business owners deal with that economic crimp that Dan just mentioned?
Justin Seedorf: Really, I think what Dan highlights here is what's transpired isn't just going to be isolated to one sector or industry. It's really already has and will continue to impact the economy as a whole. And so I think every business has to really evaluate how they've been doing business and what they need to do in the future to continue to operate, to grow and to be profitable. And one of the biggest challenges is how do you protect yourself from a series of events that may cause your customers to be unable to pay you? I mentioned how trade credit insurance can really help from a monitoring standpoint, but the also big upside of this policy that in the event that one of your customers doesn't pay, the policy steps in and pays you what you're owed. And that can be huge because it allows business owners to take a proactive stance to absorbing bad debt versus a reactive stance.
And what I mean by that is most of the time business owners, they're not really thinking about it. Once they've done their upfront due diligence, they get that customer onboarded, they start shipping to them and giving them open terms to pay them back. And that customer pays well for six months, for a year, for five years, but then something happens and that customer can't pay them. And now this business owner has to think about, how do I handle this bad debt? That's being completely reactive versus having a trade credit insurance policy in place from the beginning of that customer relationship, that business owner can ship with confidence to that customer knowing that if there ever is a bad debt experience, it's already handled, it's already taken care of with a policy. That level of confidence can really be beneficial in the economic environment we're in right now, because business owners who have that level of confidence can be very aggressive in how they expand their operations, how they go into new markets, how they actually partner with customers at a higher level versus being more restrictive because of the fear of the unknown.
Alix McCabe: So let's build on that a little bit. In tough times, there's a tendency for some businesses to sort of batten down the hatches, right? Say no to opportunities out of a fear of loss. So how could working with a company like Allianz Trade help them actually grow their sales regardless of which way the economic wins are blowing, so to speak?
Justin Seedorf: Let's just get real practical.
Alix McCabe: I'd love that. I'd love that.
Justin Seedorf: I'm the food distributor that we talked about. Okay?
Alix McCabe: Let's do it.
Justin Seedorf: And you're my customer and you call me up and you say, " Hey, I know you've given me a $50, 000 credit limit, but I can't grow to the level I want to unless you, Mr. food distributor will give me more credit, because I've got new customers coming to me." And so as the owner of this food distribution company or the CFO, I've got to then make a decision. Okay, is Alix trustworthy for more credit?
Alix McCabe: A hundred percent.
Justin Seedorf: Yeah, hopefully. But really, the tools that historically have been utilized to make that type of decision are really the gut feel, right?
Alix McCabe: Right.
Justin Seedorf: Well, I know Alix, I mean, she's been a customer for five years. She's never missed a payment. Yeah, I think we can bump her from $50, 000 to a hundred thousand dollars and that might work, but it also might not work because let's just say you are actually trying to get a higher credit limit from me because one of your other suppliers cut you off for non- payments.
Now, if I don't have the information at my disposal to be able to see that, I might put all my eggs in the basket and say, " Here you go, Alix. Here's a hundred thousand dollars of credit", to which you might run up that credit limit and then default on me like you had the other supplier. And if that happens to me, then I'm going to say, " You know what? We're never going to do that again with any other customer. We're going to keep them at the credit limits they're at." Because let's run that scenario back where you call me up and you say," Hey, Justin, I know you've had me at 50,000. I'd really like to go to a hundred thousand. I'm growing. I've got great opportunity if I can purchase more product from you." Rather than me going with my gut, I then just reach out to Allianz Trade and I say, " Hey, what do y'all know about Alix?"
She's been a customer and you've been covering her for 50,000. Would you cover her for a hundred thousand? And if Allianz comes back and says, yes, I call you up and say, " Good news, Alix, I just approved you for a hundred thousand." And you're like, great. You start purchasing more. I start shipping more. Conversely of Allianz's Trade comes back and says, " Hey, the reason Alix just called you is because one of her other suppliers just filed a claim on her. She's actually not paying other suppliers, so she's trying to now make up for that loss with you." Not only am I not going to extend you more, I might rethink the $50, 000 I've already extended to you. It allows me to take advantage of those growth opportunities with real actionable data versus just my gut filling. And so for every dollar of coverage that Allianz's Trade will provide to a policy holder is another dollar they can sell to their customers.
Alix McCabe: You're saying credit insurance is really a growth tool for businesses in that way?
Justin Seedorf: It absolutely is.
Alix McCabe: So it's not just business owners who are seeking solutions and support in this new regulatory environment that we're talking about. Allianz Trade is also working to help the banks themselves, isn't that right?
Justin Seedorf: Yeah. We mentioned these requirements that banks have to reserve capital. There's a lot of formulas and calculations that go into it, but essentially what a trade credit insurance policy from Allianz Trade is allowing banks to do is to really leverage the insurance side of the policy to offset some of the increased capital requirements that they are now seeing. Regulators, as we mentioned, are really kind of pushing further downstream and forcing these regulations on these smaller to medium- sized banks. And traditionally the only option was, " Hey, we just got to reserve more capital." But now we've really had this initiative to really get the message out to start working with banks to show them how they can actually utilize a policy to meet those Basel three guidelines without reserving as much capital as they once would've had to.
So it's a great way for these banks to meet the guidelines, but still keep a lot of that capital in circulation to keep making the loans, to keep funding the small and medium- sized businesses the way that they have. And we've already seen some great successes and we're looking forward to seeing a lot more. We think there's a huge opportunity for banks to really not just learn about, but also implement this type of strategy to help them meet the regulations that they're not really going to have a choice with.
Alix McCabe: It's interesting. It's maybe a lesser known benefit of credit insurance for the banks.
Justin Seedorf: It is. It absolutely is. And to be fair, there hasn't been a lot of widespread marketing effort for this. It's been utilized for a long time, but not to the level that it's available. And I think there's a lot more awareness about this type of product and this strategy, so to speak, that's going to be incredibly beneficial for banks and for the bank's clients.
Alix McCabe: That's awesome. Oh, that music means we're almost out of time.
Justin Seedorf: Oh, wow.
Alix McCabe: So before we send you home with some delightful wheel of risk parting gifts, I'd like to get some final thoughts from you. So what is the main thing, Justin, that you'd like for listeners to take away from the situation involving SVB and the current state of the banking sector?
Justin Seedorf: The biggest thing to realize is that you cannot just assume that everybody else is doing their due diligence. You got to do it yourself, right? You have to make sure you have sound strategies in place to protect your business without being beholden to what your bank might or might not be doing, or more importantly, what your customer's bank might or might not be doing.
Alix McCabe: It's a good takeaway. Justin, thank you so much for being back on the show. I've enjoyed our time together.
Justin Seedorf: It's been awesome. I've really enjoyed it as well.
Alix McCabe: My guest today, everybody has been Justin Seedorf, Southwest Regional Vice President here at Allianz Trade Americas. I'd also like to thank my friend Dan North, our senior economist for North America, for sharing his own expertise with us. I'm Alix McCabe, and this is Wheel of Risk, brought to you by Allianz Trade. Thanks so much for listening to our season premiere episode. If you learned something, we'd really appreciate if you could leave us a positive review. And also I'd love to connect with you on social media. You can find me as well as Dan North and Justin Seedorf all on LinkedIn. So hit us up there. Talk to you soon.