BlackRock warned Silicon Valley Bank that risk management was weak

Advisory division BlackRock warned Silicon Valley Bank, the California-based lender whose bankruptcy helped spark the banking crisis, that its risk management was “significantly substandard” in early 2022, several people with direct knowledge of the assessment said.

In October 2020, SVB asked BlackRock’s financial markets advisory group to analyze the potential impact of various risks on its securities portfolio. Later, he expanded the mandate by examining the risk systems, processes and people of the treasury department that manages the investments.

The January 2022 risk management report gave the bank a “sir Ct” and found that SVB lagged its peers on 11 of 11 factors and was “significantly below” them on 10 of 11 factors. The advisers found that SVB failed to generate real-time or even weekly updates on what was happening to its securities portfolio. SVB listened to the criticism but declined BlackRock’s offers to do more work, they added.

SVB was taken over by the Federal Deposit Insurance Corporation on March 10 after it announced a $1.8 billion loss on the sale of securities, triggering a stock price crash and a deposit outburst. That fueled fears of larger paper losses that the bank stored on long-dated securities that lost value when the Fed raised interest rates.

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The FMA Group analyzed how SVB’s securities portfolios and other potential investments respond to various factors, including rising interest rates and broader macroeconomic conditions, and how this affects the bank’s capital and liquidity. The scenarios were selected by the bank, said two people familiar with the work.

While BlackRock did not make financial recommendations to SVB in that review, its work was presented to the bank’s senior management, who “confirmed that management followed” the construction of the securities portfolio, a former SVB executive said. The executive added that “it was an opportunity to highlight the risks” that the bank’s management missed.

At the time, Chief Financial Officer Daniel Beck and other senior executives were looking for ways to boost the bank’s quarterly earnings by increasing the yield on securities on the balance sheet, people briefed on the matter said.

The review examined scenarios including interest rate increases of 100-200 basis points. But none of the models considered what would happen to SVB’s balance sheet if there were a stronger interest rate hike, such as the Federal Reserve’s rapid 4.5 percent rate hike last year. At the time, interest rates were at record lows and haven’t been above 3 percent since 2008. The consultation ended in June 2021.

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BlackRock declined to comment.

Even before the BlackRock review began, SVB began absorbing significant interest rate risks to boost profits, former employees said. The consultation did not deal with the bank’s deposit side, so there was no possibility that SVB would be forced to quickly sell assets to cover outflows, several people confirmed.

The FDIC and the California Banking Authority declined to comment. The spokesperson of the SVB group did not respond to the comment.

While the BlackRock review was underway, tech companies and venture capital firms poured a lot of cash into SVB. The bank used BlackRock’s scenario analysis to inform its investment policy during a period when management was closely focused on the bank’s quarterly net interest income, a measure of income from interest-bearing assets on the balance sheet. Most of the money ended up in long-dated, low-yielding mortgage-backed securities, which have since lost more than $15 billion.

The Financial Times previously reported that in 2018, under a new financial management system led by CFO Beck, SVB – which traditionally held its assets in securities with maturities of less than 12 months – switched to debt maturing within 10 years or later in order to increase yields. He built a $91 billion portfolio with an average interest rate of just 1.64 percent.

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The maneuver increased SVB’s revenues. Its return on equity, a closely watched measure of profitability, rose from 12.4 percent in 2017 to more than 16 percent each year between 2018 and 2021.

But the decision failed to take into account 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 pressure that would later lead to its collapse.

“Dan.” [Beck]The focus was on net interest income,” said one person familiar with the matter, adding, “it didn’t matter until it happened.”