Earlier this month I attended the Building Society’s Annual Gala dinner. It was a great opportunity to catch up and find out what is really occupying executive minds.

Of course, building societies have much to be rightly pleased about and their model and relevance is important in our lending landscape. But, more privately, there were mentions of the deposit outflows across the pond, and how stubbornly high or rising interest rates might further intensify the margin pressures facing lenders.

As a non-executive in mortgage lending, risk comes in many shapes and sizes. Credit risk, property risk, operational, regulatory, distribution and funding risks beset lenders daily. Most recently we have seen how funding risks can arise out of nowhere.

SVB and First Republic, for different reasons, have fallen foul of a rapid rise in interest rates. On April 28, 2023, the central bank’s vice chair for supervision delivered a stinging report on the collapse of Silicon Valley Bank, blaming its failures on its weak risk management – their strategy being exposed by rising interest rates – as well as supervisory failings.

The failure of both institutions has arguably highlighted how the impact of risky decisions in one part of the lending system can quickly spread into the broader financial system. If we look at why these institutions ended up in trouble then we might conclude there is a problem with incentive structures that reward excessive risk taking.

Another risk factor is that markets have operated with historically extremely low interest rates and liquidity has been supported by central bank intervention since the GFC and there is now a risk that senior risk managers have lost sight of how normal markets operate. As central banks hike rates and withdraw liquidity support some will inevitably be caught out. We have seen this both in the pensions market and with rapid withdrawal and repricing of mortgage products as rates rise unexpectedly. We have lost history and experience and increased risk as a result.

Ensuring that boards really understand how policy and incentive plans culturally impact lending decisions is something we do with the Mortgage Control Framework. But any proper crisis is usually built upon a combination of factors.

Something that was barely mentioned at the BSA was the launch of Apple’s deposit account in the US. The risk to bank deposit bases from the arrival of Big Tech players is being brought into stark relief by reports that the new savings account acquired upwards of $1 billion in consumer cash within four days of launch. The long-trailed savings account was launched with a headline-grabbing 4.15% annual percentage yield – more than 10 times the national average.

I suspect this has compounded the issue of capital outflows that followed the issues within SVB and First Republic.

Imagine for one moment just such a moment here. The impact on retail funded lenders would be seismic and, with constitutions that forbid building societies from seeking significant funding from wholesale markets might see outflows unthinkable in ordinary circumstances. Without a plan to keep the show on the road, this kind of impact could prove terminal for some.

A run on the bank is very different to those of old. Technology has meant news travels at light speed and is amplified one thousand-fold. As we race to improve the consumer experience with more digital offerings, the speed and volatility of retail funding will increase too.

Having a position to defend such a move is crucial and cementing the relationship with the right kind of borrowers and savers now even more important.

Understanding how current funding and lending strategies are exacerbating the risks facing a lender is a huge issue. The way we think about the interrelation of purpose, people, incentives, funding and technology should inform long-term strategic thinking.

Tony Ward, Non-Executive Chairman, Fortrum