# Due diligence on a bank: the red flags an analyst must catch
On 9 March 2023, depositors pulled roughly $42 billion from Silicon Valley Bank (SVB) in a single day. The bank was seized the next morning. It was not a mystery collapse. The warning signs sat in plain view on the balance sheet: a deposit base of tech startups all behaving alike, a bond portfolio bleeding value as rates rose, and a risk committee that had operated without a chief risk officer for months.
Diligence on a bank is not about reading the annual report and nodding. It is about knowing where the bodies are buried. This lesson walks a real analyst checklist across five danger zones.
Start at the top, because weak governance amplifies every other problem.
What to check:
Credit Suisse is the cautionary tale for governance rot. Years of scandals (the Archegos family office collapse cost it around $5.5 billion in 2021, the Greensill supply-chain finance funds froze around $10 billion of client money) pointed to a control culture that never held. UBS absorbed it in a state-brokered rescue in March 2023.
Analyst move: read the risk committee minutes cadence and any regulator "matters requiring attention." Repeated, unresolved findings mean the board is not managing.
A related party is anyone close to the bank: directors, major shareholders, executives, or companies they own. Lending to them cheaply or without scrutiny is one of the oldest ways to loot a bank.
What to check:
This was central to failures at banks in emerging markets and to smaller US and European institutions. The pattern is always the same: capital that looks solid is actually tied up in loans to people who control the bank.
Worked example:
Say a bank reports Tier 1 capital (its core loss-absorbing equity, roughly common equity plus retained earnings) of $2 billion, and related-party loans of $360 million.
Ratio = 360 / 2,000 = 18%.
Many supervisors get uncomfortable above a low single-digit to ~10% concentration in aggregate insider exposure. 18% is a screaming flag warranting a deep look at loan terms and collateral. (Figures illustrative.)
Banks fund themselves mostly with deposits. Not all deposits are equal.
Two questions decide fragility:
a) How concentrated is the base?
SVB's depositors were overwhelmingly venture-backed tech and healthcare firms. They talked to each other, used the same VCs, and moved as a herd. When fear hit, they all ran at once.
b) How much is uninsured?
In the US, the FDIC (Federal Deposit Insurance Corporation) insures deposits up to $250,000 per depositor per bank. In the EU, deposit guarantee schemes cover up to EUR 100,000. Deposits above those limits are "flight risk": they run first.
At SVB, an estimated 90%+ of deposits were uninsured (widely cited estimate). That is a powder keg.
Analyst move: pull the call report / Pillar 3 disclosure and compute:
Uninsured deposits / total deposits.
Then ask: are these depositors correlated? A regional bank serving diverse local businesses is far safer than one serving one hot industry, even at the same headline number.
The FDIC BankFind Suite lets you inspect US bank financial data directly and for free.
This is the mechanical piece that killed SVB, and it is arithmetic.
SVB parked huge deposits in long-dated US Treasuries and mortgage-backed securities when rates were near zero. When the Fed hiked aggressively through 2022 and 2023, those bonds lost market value. Bonds and rates move inversely.
Two accounting buckets matter:
SVB had large unrealized HTM losses. On paper, fine. But when the run forced asset sales, those paper losses became real, and the capital hole was exposed.
Watch the LCR: the Liquidity Coverage Ratio requires banks to hold enough high-quality liquid assets to survive a 30-day stress. A ratio comfortably above 100% is the regulatory floor, but a herd-like deposit base can exhaust it faster than the model assumes.
AML (Anti-Money Laundering) failures do not usually cause a run, but they generate massive fines, force out management, and signal broken controls.
What to check:
Danske Bank's Estonian branch processed an estimated EUR 200 billion of suspicious transactions over several years, one of the largest AML scandals on record, ending in a guilty plea and around $2 billion in US penalties in 2022. The controls failure was known internally long before it became public.
Analyst move: if AML fines recur, the bank has a culture problem, not a one-off. Treat it as a governance red flag too.
Knowledge check
1. Why does the lesson recommend that a bank analyst begin diligence with governance rather than the balance sheet?
2. An analyst notes that a bank operated without a chief risk officer during a period of rapidly rising interest rates. Why is this timing especially concerning?
3. What does a pattern of repeated, unresolved regulator 'matters requiring attention' most strongly signal to an analyst?
4. Select ALL correct answers about why a deposit base of tech startups made SVB fragile.
Select all the correct answers.
5. Select ALL correct answers about assessing a bank's board during due diligence.
Select all the correct answers.
Banks can move exposure off the balance sheet into structures that do not show up in headline capital ratios. This was central to 2008 (structured investment vehicles) and it never fully went away.
What to look for:
Credit Suisse's exposure to Archegos was effectively a concentrated, poorly-margined bet on a single client running leveraged equity positions. It sat in a corner of the prime brokerage business the risk function did not properly police.
Analyst move: read the notes to the accounts, not just the face of the balance sheet. The phrase "commitments and contingencies" is where the real story often lives.
No single flag is fatal. The pattern is what kills:
| Danger zone | The SVB / Credit Suisse tell |
|---|---|
| Governance | No CROCROConversion Rate Optimization (CRO) is the systematic practice of increasing the percentage of users who complete a desired action, using data, testing, and user research.View full definition →; passive board; repeat scandals |
| Related-party | Insider loans above prudent share of capital |
| Deposit concentration | Herd depositors, high uninsured % |
| Rate/liquidity | Hidden HTM losses, thin liquidity buffer |
| AML | Recurring fines, high-risk clients |
| Off-balance-sheet | Concentrated client bets, contingent draws |
An analyst who spotted three or more of these at SVB in early 2023 had the full picture before the market did.