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BlackRock’s consulting arm warned Silicon Valley Bank, the California-based lender whose failure helped spark a banking crisis, that its risk controls were “substantially below” its peers in early 2022, several people with direct knowledge of the assessment said.

SVB hired BlackRock’s Financial Markets Advisory Group in October 2020 to analyse 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, which managed the investments.

The January 2022 risk control report gave the bank a “gentleman’s C”, finding that SVB lagged behind similar banks on 11 of 11 factors considered and was “substantially below” them on 10 out of 11, the people said. The consultants found that SVB was unable to generate real time or even weekly updates about what was happening to its securities portfolio, the people said. SVB listened to the criticism but rebuffed offers from BlackRock to do follow up work, they added.

SVB was taken over by the Federal Deposit Insurance Corporation on March 10 after it announced a $1.8bn loss on sales of securities, sparking a share price collapse and a deposit run. It accentuated fears over larger paper losses the bank was nursing in long-dated securities that lost value as the Fed raised interest rates.

The FMA Group analysed how SVB’s securities portfolios and other possible 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. The scenarios were selected by the bank, two people familiar with the work said.

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

At the time chief financial officer Daniel Beck and other top executives were looking for ways to increase the bank’s quarterly earnings by bolstering the yield of securities it held on its balance sheet, said people briefed on the matter.

The review looked at scenarios including interest rate rises of 100 to 200 basis points. But no models considered what would happen to SVB’s balance sheet if there was a sharper rate rise, such as the Federal Reserve’s swift increases to a 4.5 per cent base rate over the past year. At the time, interest rates were rock bottom and had not been above 3 per cent since 2008. That consultation concluded in June 2021.

BlackRock declined to comment.

SVB had already begun to absorb large interest rate risks to bolster profits before the BlackRock review began, said former employees. The consultation did not consider the deposit side of the bank, so did not delve into 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 going on, technology companies and venture capital firms were depositing a flood of cash into SVB. The bank used BlackRock’s scenario analysis to validate its investment policy at a time when management was focused closely on the bank’s quarterly net interest income, a measure of earnings from interest bearing assets on its balance sheet. Much of the money ended up in long-dated mortgage securities carrying low yields that have since lost over $15bn in value.

The Financial Times previously reported that in 2018, under a new regime of financial leadership led by CFO Beck, SVB — which historically held its assets in securities maturing in under 12 months — shifted to debts maturing 10 years or later to bolster returns. It built a $91bn portfolio carrying an average interest rate of just 1.64 per cent.

The manoeuvre bolstered SVB’s earnings. Its return on equity, a closely watched profitability measure, increased from 12.4 per cent in 2017 to more than 16 per cent in every 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 lead to substantial deposit outflows, said insiders, exposing the bank to financial pressures that would later lead to its downfall.

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

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