BlackRock’s consulting arm warned Silicon Valley Bank, the California-based lender whose failure helped spark the banking crisis, that its risk management was “significantly below” that of its peers in early 2022, several people with direct knowledge of the assessments said.
In October 2020, SVB hired BlackRock’s Financial Markets Advisory Group to analyze the possible effects of various risks on its securities portfolio. It later expanded its mandate to investigate risk systems, processes and people in its finance department, which managed investments.
A January 2022 risk management report gave the bank a “gentleman’s C”, saying SVB lagged behind peers in 11 of 11 factors considered and was “significantly below” in 10 of 11, the people said. The consultants found that SVB was unable to produce real-time or even weekly updates on events in its securities portfolio, the people said. SVB listened to the criticism but rejected BlackRock’s offers for further work, they added.
The Federal Deposit Insurance Corporation took over SVB on March 10 after it reported a $1.8 billion loss on securities sales, triggering a stock price crash and a run on deposits. That added to fears of bigger paper losses, which the bank managed with long-dated securities that lost value when the central bank raised interest rates.
FMA Group analyzes how SVB’s securities portfolios and other potential investments would react to various factors, such as rising interest rates and broader macroeconomic conditions, and how that would affect the bank’s capital and liquidity. The bank chose the scenarios, said two people familiar with the work.
While BlackRock did not make financial recommendations for SVB in that review, its work was presented to the bank’s senior management, which “confirmed that management was on the move” in building its securities portfolio, said one former SVB executive. The executive added that it was an “opportunity to highlight the risks” that the bank’s management missed.
At the time, CFO Daniel Beck and other top executives were looking for ways to boost the bank’s quarterly earnings by boosting returns on the securities on its balance sheet, people briefed on the matter said.
The review looked at scenarios that included a 100–200 basis point interest rate increase. But none of the models considered what would happen to SVB’s balance sheet if there were a sharper rate hike, like the Federal Reserve’s rapid hike to 4.5 percent over the past year. At that time, interest rates were at rock bottom and have not been above 3 percent since 2008. The negotiation ended in June 2021.
BlackRock declined to comment.
SVB had already begun taking on large interest rate risks to boost profits before the BlackRock review began, former employees said. The negotiations did not take into account the deposit side of the bank, so the possibility that SVB would have to sell assets quickly to cover the outflows was not considered, several people confirmed.
The FDIC and California banking officials declined to comment. The spokesperson for the SVB Group did not respond to a request for comment.
At the time of BlackRock’s review, tech companies and venture capital firms were depositing cash with SVB. The bank used BlackRock’s scenario analysis to validate its investment policy at a time when management was closely focused on the bank’s quarterly net interest income, which measures the return on interest-bearing assets on its balance sheet. Much of the money ended up in long-dated mortgage-backed securities with low yields that have since lost more than $15 billion in value.
The Financial Times previously reported that in 2018, under a new financial management system led by CFO Beck, SVB – which historically held its assets in securities maturing in less than 12 months – shifted to loans maturing in 10 years or more to support yields. It built a $91 billion portfolio with an average interest rate of just 1.64 percent.
The measure strengthened SVB’s result. Its return on equity, a closely watched measure of profitability, rose from 12.4 percent in 2017 to more than 16 percent every year from 2018 to 2021.
But the decision ignored the risk that rising interest rates would reduce 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.
“And [Beck]The focus was on the interest rate cap,” one person familiar with the matter said, adding, “it worked until it didn’t.