BlackRock’s advisory arm has warned Silicon Valley Bank, the California-based lender whose failure helped trigger a banking crisis, that its risk controls were “significantly weaker” than those of its peers at the start of 2022, a said several people with direct knowledge of the evaluation.
SVB engaged BlackRock’s Financial Markets Advisory Group in October 2020 to analyze the potential impact of various risks on its securities portfolio. He then expanded the remit to look at the risk systems, processes and people of his treasury department, which managed investments.
The January 2022 Risk Control Report gave the bank a “gentleman’s C”, concluding that SVB lagged similar banks on 11 out of 11 factors considered and was “significantly below” them on 10 out of 11, the people said. Consultants found that SVB was unable to generate real-time or even weekly updates on what was happening to its securities portfolio, the people said. SVB listened to the criticism but rejected offers from BlackRock to do follow-up work, they added.
SVB was taken over by the Federal Deposit Insurance Corporation on March 10 after reporting a loss of $1.8 billion on sales of securities, causing the stock price to crash and a rush to deposits. That heightened fears about larger paper losses the bank was nursing in long-term securities that lost value as the Fed raised interest rates.
The FMA Group analyzed how SVB’s securities portfolios and other possible investments would react to various factors, including rising interest rates and broader macroeconomic conditions, and how this would affect the bank’s capital and liquidity. . The scenarios were selected by the bank, said two people familiar with the matter.
Although BlackRock did not make any financial recommendations to SVB during this review, its work was presented to the bank’s senior management, who “confirmed that management was on the right track” in building its portfolio. titles, said a former SVB executive. The executive added that it was “an opportunity to highlight risks” which 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 bolstering the yield of securities it held on its balance sheet, people briefed on the matter said. .
The review looked at scenarios that included interest rate hikes of 100 to 200 basis points. But neither model has factored in what would happen to SVB’s balance sheet if there was a bigger rate hike, such as the Federal Reserve’s rapid increases to a 4.5% base rate over the past year. past year. At the time, interest rates were at their lowest and had not exceeded 3% since 2008. This consultation ended in June 2021.
BlackRock declined to comment.
SVB had already started taking on significant interest rate risk to bolster its earnings before the BlackRock review began, former employees said. The consultation did not take into account the deposit side of the bank, and therefore did not explore the possibility that SVB would be forced to sell assets quickly to meet cash outflows, several people confirmed.
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, tech companies and venture capitalists were pouring a flood of money into SVB. The bank used BlackRock’s scenario analysis to validate its investment policy at a time when management was narrowly focused on the bank’s quarterly net interest income, a measure of income from interest-bearing assets in its balance sheet. Much of the money ended up in low-yielding long-term mortgage securities that have since lost more than $15 billion in value.
The Financial Times previously reported that in 2018, under a new regime of financial leadership led by Chief Financial Officer Beck, SVB – which historically held its assets in securities maturing in less than 12 months – moved to debt arriving maturing in 10 years or more to enhance returns. He has built a $91 billion portfolio bearing an average interest rate of just 1.64%.
The move bolstered SVB’s revenue. Its return on equity, a closely watched measure of profitability, grew from 12.4% in 2017 to more than 16% each year from 2018 to 2021.
But the decision ignored the risk that rising interest rates would both reduce the value of its bond portfolio and lead to large deposit outflows, insiders said, exposing the bank to financial pressures that would later lead to his downfall.
“And [Beck]the focus was on net interest income,” a person familiar with the matter said, adding that “it worked until it didn’t.”