Gordon Stuart is a partner in Chaperon, which helps businesses navigate their dealings with banks. He has a lengthy career working in the banking sector.

OPINION: Do you really understand the risks of the business you are either running, managing, or performing a governance role for?

The backdrop to that question comes from the failures of SVB and Signature Bank, together with the bailout and takeover of Credit Suisse. Ironically, former congressman Barney Frank (of Dodd-Frank Act) was on the board of failed Signature Bank – the third-largest bank failure in US history. The Dodd-Frank Act was a major reform of the U.S. financial system after the 2008 crisis.

Did the financial institutions and their independent directors in question really understand their risks, and have appropriate strategies in place to manage them? It appears not.

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While convenient to point to specific failures and the financial system, there will be many aspects that need further examination including management and governance – and where were the regulators in all this?

No doubt enquiries will follow, but lets step back and think about the bigger picture.

The European Central Bank has hiked 50 basis points, the US Federal Reserve 25 basis points and Bank of England 25 basis points after recent global financial ructions kicked off. They are on a mission to contain inflation.

Inflation is a problem. They are intent on meeting their objectives of low inflation. This means more collateral damage is around the corner. Forget about a soft landing for the global economy. That presents a huge layer of risk any business needs to be aware of.

Rising interest rates exposure weak business models. The era of ridiculously low interest rates is over.

Business models conditioned on a low cost of capital are going to be exposed, think the tech sector, property and private equity. Leverage is your friend in a low-interest-rate world and a nemesis in a rising and higher one.

Some sectors are more vulnerable than others. Construction does well in an upswing. The construction industry swings from boom to bust with large projects won on wafer-thin margins. It is a tough business requiring best in class management. The list of risks a construction management business face is long – from inflation and supply delays, to weather and natural disasters.

Failure to manage those risks can result in losses, cost overruns, and costly disputes.

To be successful in any business you need to avoid the risks if possible (but it is impossible to completely de-risk), transfer the risks (e.g. insurance), mitigate the risks (processes and systems) and manage and accept the risk. That sounds easy in practice. It is not.

You also need to understand your interest-rate risk and that’s not easy.

Derivative products used to manage risks can be complex. Do boards really understand the contractual arrangements that have been entered with financiers? Are they prudent? Does the board have the requisite financial acumen to drive constructive tension around the board-room table and with management?

The failed Silicon Valley Bank (SVB) – the second-largest bank collapse in US history – had 11 independent directors plus the CEO on its board. The spotlight will be put on them. SVB will not be alone facing scrutiny.

So what comes next?

Brace for the unknown: A collection of arguably black-swan and incredible events got us into this inflationary mess. They include Covid, money printing and central bank largesse, zero and negative interest rates, huge fiscal responses. There is no playbook to unwinding it but unwind it we must.

Volatility and market illiquidity are now a norm.

Planning and forecasting is now extremely difficult, but what is most important, is to know how much cash you have and to be able to forecast and develop a range of downside and upside scenarios so you can make necessary change quickly.

Another shift in the credit landscape: Credit is the lifeblood that pumps through many businesses’ veins. Credit appetites will tighten globally. Regulators will act. Businesses need to be more proactive being on top of their credit story and financier relationship. Banks and Insurers don’t share in upside– they take downside risk – hence your presentation needs to focus on how they are going to be repaid, and most importantly how business and operating risks are mitigated.

Wholesale interest rates are lower but the credit cost to borrowing is likely higher.

The bottom line. Like a gazelle, business needs to be alert, fleet of foot and able to change direction instantly to escape the cheetah, every hour of every day. .