BlackRock’s consulting arm warned Silicon Valley Bank, the California-based lender whose failure helped trigger the banking crisis, that its risk controls were “significantly below” those of its peers as early as 2022, several people with direct knowledge of the assessment said.
SVB hired BlackRock’s Financial Markets Advisory Group in October 2020 to analyze the potential impact of various risks on its securities portfolio. It later expanded its mandate to examine risk systems, processes and people in its treasury department, which manages investments.
A January 2022 risk control report gave the bank a “gentleman C”, finding that SVB lagged behind peer banks on 11 of 11 factors and “significantly below” on 10 of 11, the people said. The advisers found that SVB was unable to generate real-time or weekly updates about what was happening in its securities portfolio, the people said. SVB listened to the criticism but rejected BlackRock’s offers to do follow-up work, they added.
After the Federal Deposit Insurance Corporation announced on March 10 a $1.8bn loss on the sale of securities to SVB, share prices fell and deposits fell. That adds to fears over large paper losses the bank is nursing in long-dated securities that lose value as the Fed raises interest rates.
FMA Group analyzed how SVB’s securities portfolio and other potential investments would respond to various factors, including rising interest rates and broader macroeconomic conditions, and how that would affect the bank’s capital and liquidity. Two people familiar with the work said the scenarios were selected by the bank.
While BlackRock did not make financial recommendations to SVB in that review, its work was presented to the bank’s senior leadership, who confirmed that “direction management continues” in building its securities portfolio, a former SVB executive said. The executive added that it was an “opportunity to highlight risks” that the bank’s management had missed.
At the time, Chief Financial Officer Daniel Beck and other top executives were looking for ways to boost the bank’s quarterly earnings by boosting the yield on securities held on its balance sheet, people briefed on the matter said.
The review looked at scenarios including a 100 to 200 basis point hike in interest rates. But none of the models factored in what would happen if SVB’s balance sheet grew sharply, like the Federal Reserve’s rapid hike in its base rate of 4.5 percent over the past year. At the time, interest rates were at rock bottom and had not been above 3 percent since 2008. That consultation was completed in June 2021.
BlackRock declined to comment.
Even before BlackRock’s review began, SVB had already started taking big interest rate risks to boost profits, former employees said. The consultation did not take into account the bank’s deposit side, so it did not take into account the possibility that SVB would be forced to sell assets quickly to meet outflows, several people confirmed.
The FDIC and California banking regulators declined to comment. A spokesperson for SVB Group did not respond to a request for comment.
While the BlackRock review was underway, technology companies and venture capital firms were pouring cash into SVB. The bank used BlackRock’s scenario analysis to validate its investment policy while management focused on the bank’s quarterly net interest income, a measure of earnings from interest-bearing assets on its balance sheet. Most of the money ended up in long-dated mortgage securities with low yields that lost more than $15bn in value.
The Financial Times previously reported that in 2018, under a new financial leadership regime led by CFO Beck, SVB – which historically held its assets in securities maturing within 12 months – shifted to debt maturing 10 years or longer to boost returns. It built a $91bn portfolio with an average interest rate of just 1.64 per cent.
This maneuver boosted SVB’s earnings. Its return on equity, a closely watched measure of profitability, rose from 12.4 percent in 2017 to more than 16 percent annually from 2018 to 2021.
But the decision failed to consider the risk that rising interest rates would erode the value of its bond portfolio and lead to significant deposit outflows, insiders said, exposing the bank to financial pressures that would later lead to its collapse.
“Dan [Beck]’s focus was on net interest income,” said a person familiar with the matter, “and worked until it did”.
