SVB’s Investment Portfolio: Lessons on Navigating Interest Rates Impact

This article analyzes the impact of interest rates on bank’s investment portfolios, drawing valuable insights from Silicon Valley Bank’s experience.

Interest rate risk is an important factor for banks to consider, particularly when making an investment in securities. Banks are required by accounting requirements to categorise securities as Held For Trading (HFT), Available For Sale (AFS), or Held To Maturity (HTM). An upsurge in interest rates can have a negative impact on the fair value of HTM securities, which can have a negative impact on the bank’s capital. The SVB Financial Group (SVB) crisis is a recent example that demonstrates the hazards of big swings in interest rates on HTM assets. SVB had a $91bn HTM portfolio as of 31^st of December 2022, in company of having a $15.16bn unrealized loss.

Furthermore, SVB invested a major amount of its deposits, which have grown dramatically over time, in long-term investment instruments with varied maturity characteristics. This resulted in an asset-liability mismatch, which exacerbated the situation when depositors began withdrawing their monies. The SVB crisis emphasises the significance of adequate risk management methods in the banking industry. The SVB crisis underlined the significance of risk management techniques that are wise in order to avert potentially catastrophic scenarios. A comparison of SVB’s condition with the top ten Indian banks in terms of market capitalization as of March 31, 2022 revealed that the Indian banking ecosystem is fundamentally more resilient.

Indian banks have a smaller share of HTM investments in their entire investment book and total assets, as well as a large and extensive branch network. Moreover, the Reserve Bank of India mandates that banks uphold a Liquidity Coverage Ratio by making an investment in High-Quality Liquid Assets.

Yet, in their annual financial statements, Indian banks are not required to declare the fair value of their HTM portfolio. To avoid potentially disastrous circumstances, banks must constantly use cautious risk management methods.