From the Washington Post, April 2:
Focused on profits, leaders made decisions that foreshadowed the bank’s surprise failure
Flush with cash from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to juice profits that quickly triggered an internal alarm.
In buying longer-term investments that paid more interest, SVB had fallen out of compliance with a key risk metric. An internal model showed that higher interest rates could have a devastating impact on the bank’s future earnings, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations. Instead of heeding that warning — and over the concerns of some staffers — SVB executives simply changed the model’s assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, initially predicted that rising interest rates would have minimal impact.
The new assumptions validated SVB’s profit-driven strategy, but they were profoundly misplaced. Over the past year, interest rates have climbed nearly five percentage points, the fastest pace since the 1980s. Meanwhile, the tech industry has entered a post-pandemic swoon, causing SVB’s elite clientele to withdraw cash far faster than bank executives had expected.
On March 8, the bank was forced to raise additional cash by selling securities at a $1.8 billion loss. That touched off panic among SVB clients, who staged one of the biggest bank runs in U.S. history. Fanned by social media, depositors tried to withdraw $42 billion in a single day. The next morning, the bank collapsed and federal regulators took control.
The episode shows that executives knew early on that higher interest rates could jeopardize the bank’s future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB’s stunning meltdown.
“Management always wanted to tell a growth story,” one former employee involved in the bank’s risk management said. “Every quarter, there was always this pressure to deliver earnings.”
The new revelations come as lawmakers and regulators review what a senior Federal Reserve official called a “textbook case of mismanagement” leading to the nation’s second-largest bank failure. Much of their focus will turn to the arcane world of managing interest-rate risk. SVB’s new projections took effect last year and assumed that cash flow from deposits would stay consistent for longer, softening the projected bite of higher interest rates. Before changing the model, a 2 percent interest-rate hike would drop a measure of future cash flows by more than 27 percent; afterward, the hit was less than five percent, according to the bank’s securities filings.
Pushing for the change in assumptions was Dan Beck, SVB’s chief financial officer, according to one former employee, and it was approved by the bank’s Asset Liability Management Committee, which manages interest-rate risk, both former employees said. The change made several mid-level bank officials uncomfortable, one person said, though there was historical data on deposits to support it....
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