BlackRock’s advisory arm warned Silicon Valley Bank, the California-based lender whose failure helped spark a banking crisis, that its risk controls were “significantly below those of peers” in early 2022, several people with direct knowledge of the valuation said.
SVB engaged BlackRock’s Financial Markets Advisory Group in October 2020 to analyze the potential impact of various risks on its securities portfolio. It later expanded the mandate to examine the risk systems, processes and people in its treasury department that managed the investments.
The January 2022 risk control report gave the bank a “gentleman’s C”, noting that SVB underperformed similar banks on 11 out of 11 factors considered and was “well below” them on 10 out of 11, the people said. Advisors found that SVB was unable to generate real-time or even weekly updates on what was happening with its securities portfolio, the people said. SVB listened to the criticism but turned down offers from BlackRock to do follow-up work, they added.
SVB was acquired by the Federal Deposit Insurance Corporation on March 10 after posting a $1.8 billion loss interest rates increased.
The FMA Group analyzed how SVB’s securities portfolios and other potential 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 chosen by the bank, said two people familiar with the work.
While BlackRock SVB made no financial recommendations in this review, its work was presented to the bank’s senior management, which “confirmed the direction management has taken in building its securities portfolio,” said a former SVB executive. The board 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 profits by increasing yields on the securities held on its balance sheet, people briefed on the matter said.
The review considered scenarios involving rate hikes of 100 to 200 basis points. But neither model accounted for what would happen to the SVB balance sheet if there were more interest rate hikes, such as the Federal Reserve’s rapid hikes to a 4.5 percent interest rate last year. At that point interest rates were at their lowest point and had not been above 3 percent since 2008. This consultation ended in June 2021.
BlackRock declined to comment.
SVB had already started absorbing large interest rate risk to bolster profits before the BlackRock review began, former employees said. The consultation did not consider the deposit side of the bank and therefore did not address the possibility that SVB would be forced to sell assets quickly to cover outflows, several people confirmed.
The FDIC and the California banking regulator declined to comment. A spokesman for the SVB group did not respond to a request for comment.
While the BlackRock review was underway, tech companies and venture capital firms poured cash into the SVB. The bank used BlackRock’s scenario analysis to validate its investment policy at a time when management was heavily focused on the bank’s quarterly net interest income, a measure of income from interest-bearing assets on its balance sheet. Much of the money ended up in long-dated, low-yield mortgage securities, which have since lost over $15 billion in value.
The Financial Times previously reported that SVB – which has historically held its assets in securities with a maturity of less than 12 months – in 2018 under a new regime of financial governance led by CFO Beck on debt with maturity switched 10 years or later to increase returns. It built a $91 billion portfolio with an average interest rate of just 1.64 percent.
The maneuver strengthened the result of the SVB. Return on equity, a closely watched profitability metric, increased from 12.4 percent in 2017 to over 16 percent each year from 2018 through 2021.
But the decision failed to account for the risk that rising interest rates would both lower the value of its bond portfolio and cause significant deposit outflows, insiders said, putting the bank under financial pressure that would later lead to its demise.
“Dan [Beck]The focus was on the interest surplus,” says a connoisseur, adding: “It worked until it didn’t work anymore”.