After the collapse of the Silicon Valley Bank, a new study has found that 186 US banks are at the risk of meeting a similar fate.
The major reasons for this are rising interest rates and high proportion of uninsured deposits, said the report.
The Social Science Research Network study, named ‘Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?’, says that 186 banks could fail if even half of their uninsured depositors withdraw their funds.
“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk,” says the report. The study also suggests that more banks could be at risk if uninsured deposit withdrawals cause even small fire sales.
The major concern for the studied banks is that they hold majority of their assets in government bonds and mortgage-backed securities, which are sensitive to interest rates. The value of those assets took a dip because of the recent rise in interest rates by the Federal Reserve.
The Silicon Valley Bank fell prey to these rising interest rates as it held much of its assets in long-term government bonds. These government bonds didn’t hold as much worth as when they were bought because they paid less then the current interest rate. To make up for the deposit withdrawal demand by customers, SVB sell off some of these assets at a loss of close to $2 Billion. The disclosure of these losses sparked fear among its customers, mostly comprising of tech start-ups, resulting in them withdrawing their money.
The report says that SVB wasn’t the worst capitalized bank and 10% of banks have lower capitalization than SVB. However, SVB had a significant amount of uninsured deposits. “Only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run,” said the report.
The report hints that 186 banks face a similar potential risk of failure if they don’t have any escape. “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalisation,” said the report.