WASHINGTON–As is often asked in credit unions after there is a CU failure of any size, the banking industry, analysts and government officials are, not surprisingly, asking how Silicon Valley Bank missed the interest rate risk that ultimately led to it failing.
“As it accumulated billions worth of fixed-rate Treasurys and mortgage bonds in recent years, SVB failed to anticipate the speed at which the Federal Reserve would move with interest-rate hikes last year,” the Wall Street Journal said in its analysis. “But the bank’s rapid rise this century took place mostly in an era of very low interest rates and freely flowing money.”
As has been reported, SVB operated without a chief risk officer for much of 2022, and issues on its balance sheet had been flagged by its regulator, the Federal Reserve.
Noting SVB is hardly alone, the Journal said bankers, regulators, analysts and investors are now being asked to “contemplate things that may not have happened in decades,” while relying on expectations of market and customer behavior formed during the easy-money era.
“For the last 15 years, almost all deposit behaviors were masked, and looked similar,” Bob Warnock, senior client adviser at data provider Curinos told the Journal. “You would need a team that has been around since the 1980s to understand what the next several years might look like.”
Not a Return to Normal
The Journal said in its analysis that even as the Fed’s rate increases began in 2022 bankers might have thought they would have more time to adjust to a new normal, “but that isn’t how things have played out.” Instead, the Fed has raised interest rates at the fastest pace in decades.
“The problem for banks right now isn’t just that some lenders locked up their money in bonds and mortgages at what could prove to be well-below market rates for a long time,” the Journal reported. “That can be mostly an earnings problem. And buying Treasurys was in some ways a logical response to regulatory incentives, since they counted as zeros when it came to calculating the risky assets that determine how much equity capital a bank needs.”
‘Fateful Mistakes’
The analysis added that what turned those moves into fateful mistakes was also failing to contemplate how depositors would react to rising rates.
“Even before depositors got skittish about the impact of interest rates on banks’ assets, savers were already seeking out higher rates, with options ranging from money funds to online banks and brokers,” the Journal stated. “For example, many banks have become accustomed to having a base of deposits that aren’t paid any interest. These can be things like checking accounts for people and businesses. These accounts can be inconvenient to move, because customers are using them every day, and they can be a key part of banks’ overall relationships with their customers. Having these deposits has been seen as a source of strength, and a driver of what is known as ‘asset sensitivity’—that a bank was more exposed to the benefits of rising interest rates than to their drawbacks.
“But noninterest-bearing deposits haven’t always played as big of a role,” even as those deposits have been falling faster than deposits overall.