The 2023 Bank Debacle and Healthcare Risk Management

4 minute
Banking collage

Current Funding Environment

Healthcare debt issuance remains incredibly light, across both public and private channels. There is significant volatility across all fixed income markets, but benchmark funding rates remain attractive versus long-term averages. Municipal ratios have moved higher in response to moderating funds flows but also remain below 10-year trailing averages. Pressure on general credit, bank products, and less liquid asset classes (like municipals) may emerge and create additional funding challenges.


1 Year

5 Year

10 Year

30 Year

 March 24 — UST





v. March 10

-55 bps

-56 bps

-33 bps

-6 bps

March 24 — MMD*





v. March 10

-35 bps

-35 bps

-22 bps

-13 bps

March 24 — MMD/UST





v. March 10





*Note: MMD assumes 5.00% coupon

SIFMA reset this week at 4.35%, which is approximately 90% of 1-Month LIBOR and represents a +214 basis point adjustment versus the March 8, 2023, reset.

Lessons from the Past Two Weeks

Pogo cartoon

A discouraging couple of weeks. Nothing as gut-wrenching as the credit crisis of 2007-2008 or the liquidity crisis of 2020, but just the stark reality of what might charitably be called a crisis of stewardship. It is hard to square the most pervasive regulatory construct in the history of finance—aka, Dodd-Frank—with the inability of our financial system governance bodies to anticipate what duration risk might do to the integrity of collateral pools (i.e., the huge chunk of bank assets held as fixed income investments) whose value everybody in the governance group knows to be the product of credit plus interest rates plus duration. Pogo lives!

Bank-fueled anxiety continues to ripple across the capital markets, with Treasury Secretary Janet Yellen last Tuesday suggesting to the American Bankers Association that the “let’s insure everybody” playbook the FDIC rolled out to try to stifle any contagion from the Silicon Valley Bank (SVB) and Signature Bank failures could be extended to other institutions, as needed. The prior weekend, long-maligned Credit Suisse joined the short list of casualties after Swiss regulators forced a union with UBS. And various parts of the fixed income markets—such as mortgage-backed securities—have experienced additional volatility that is being attributed to the anticipated rebalancing of bank financial asset portfolios.

Meanwhile, on Wednesday the Fed (reluctantly?) opted to prioritize inflation over the banks and increased the Fed Funds rate another 25 basis points. Two weeks ago, just prior to the SVB collapse, Chairman Powell suggested that economic and inflation data were pointing to a 25 to 50 basis point hike at this next meeting; according to Powell, during the meeting 50 was taken off the table and zero was actively discussed before the group landed on 25. The post-meeting messaging is that the Fed is near the peak of its expected rate-hike cycle, with another 25 basis point move likely before they hit pause. The rhetoric may have shifted away from “we’ll go as far as necessary to achieve price stability,” but we’ll see how that works out since events have been dictating Fed policy for the last 18 months versus the other way around.

Everything continues to suggest the banking crisis has been contained such that any ripple impacts aren’t likely to result in more banks being shut down. Instead, the new thread seems to be that all this turmoil will lead to a credit crunch that will have something of a multiplier effect on Fed rate policy. The published commentary following the Wednesday Fed meeting stated that “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.” In his Wall Street Journal article on the topic, Nick Timiraos explained that “banking-sector tremors are likely to lead to a pullback in lending because banks will face increased scrutiny from bank examiners and their own management teams to reduce risk taking.”

So, the new line seems to be that SVB started a process that will result in a credit crunch that will stall economic and hiring activity enough to moderate inflationary pressures and allow the Fed to take its foot off the rate-hike accelerator. One problem with this plan might be that none of the recent bank events had anything to do with the credit quality of the individuals or companies that are or will be looking for credit; and it seems to presume that making actual loans is less attractive to a bank than investing in financial assets or that banks that can post underwater collateral at the Fed to access capital won’t do so. But, regardless of what transpires, the best practice for healthcare organizations is to reassess your reliance on bank credit-liquidity over the near-term horizon, know your counterparties, including those responsible for providing custody services, pay close attention to bank relationships, and prepare for a scenario that includes deteriorating credit-liquidity product access, pricing, or terms.

While nothing positive occurred over the past two weeks, events do serve as a useful reminder of the distinction between “compliance/regulatory” versus “actionable” risk management. Compliance-driven risk management is too often a box-checking exercise that creates the illusion that risk cataloguing is risk management. The need, instead, is to focus on the subset of risks that create systemic threats and then close the loop by understanding how to position your organization’s risk-bearing resources to actively respond to those risks. For healthcare, the task is to position resources with the following types of questions in mind:

  1. What is the subset of risks whose realization would alter operating performance in ways that might threaten a financial covenant breach, or create a capital deficiency, or weaken credit position and retard external capital access, or that might otherwise increase the load the balance sheet must carry to contribute returns or fund capital or serve as the credit stabilizing agent?
  2. What is the subset of risks that might alter the balance sheet’s ability to accumulate and position the resources needed to meet the central obligation of protecting and advancing the operating/mission side of the house?

In the case of SVB, its risk-weighted regulatory capital position (its actual loan portfolio paired with the credit quality of its financial investment portfolio) seemed fine; but the composition of its balance sheet carried risk that was triggered as soon as it (the balance sheet) had to respond to operating dislocation (accelerated depositor withdrawals). SVB’s balance sheet was positioned to respond to its regulatory world (credit focus) instead of its operating world (liquidity focus). While not-for-profit healthcare organizations are driven by operations and strategy, the sector is built on a balance sheet foundation. The “easy” lesson from the last two weeks is to pay attention to your bank partners; the more complicated lesson is to do the work needed to tilt your balance sheet towards the actionable versus the compliance side of the risk management equation.

Using invested assets as an example, the compliance side assumes a separate ecosystem that lives inside an Investment Policy Statement that defines how much investment risk or illiquidity risk to tolerate across a universe of acceptable asset classes. This is, of course, investment risk management 101, but it isn’t enough. Instead, the imperative is to go past the compliance threshold and assess positioning these investment resources such that they also actively anticipate risks that sit within operations and capital. You close the circle by transforming risk management into an essential part of how you position your balance sheet to actively support a complex, vibrant, but deeply challenged not-for-profit healthcare enterprise.

Eric Jordahl directs Kaufman Hall’s Treasury and Capital Markets practice and focuses on helping healthcare organizations nationwide by providing Treasury-related transactional, strategic, and management support across all financial assets and liabilities.
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