Nearly 200 banks could fail the same way SVB did: study


March 18, 2023 | 12:03

Nearly 200 other banks could be vulnerable to the same type of risk that brought down Silicon Valley Bank: the value of the assets they hold.

There are 186 banks across the country that could fail if half of their depositors quickly withdraw their funds, according to a new study published on the Social Science Research Network. Even insured depositors — those with $250,000 or less in the bank — could have trouble getting their money if these institutions face the kind of run-in that Silicon Valley experienced a week ago.

The problem is that these banks hold a large portion of their assets in interest-rate sensitive financial instruments, such as government bonds and mortgage-backed securities. The value of these older, low-interest investments fell sharply when the Federal Reserve raised interest rates over the past year.

In the case of SVB, the Santa Clara, Calif.-based institution has placed much of its cash in long-term government bonds, which are ultra-safe in terms of losing the initial investment. but weren’t worth as much as when SVB bought them. , because interest rates have since risen. The bank had to sell some of these bonds to meet customer withdrawal requests at a lower price than it had paid, resulting in a loss of almost $2 billion.

Many risky banks hold their depositors’ cash in long-term assets such as bonds and mortgages.

When SVB revealed the loss, along with a plan to raise another $500,000 million from Wall Street, it sparked fears among its venture capital and tech start-up clientele that the bank was insolvent. In a panic fueled by social media, customers rushed to withdraw their money, fearing the bank had run out of business – a classic bank run.

The feds stepped in to promise it would support all depositors, not just those with the FDIC’s $250,000 limit, in an effort to stop a broader panic where depositors began withdrawing cash. other banks that are roughly the same size.

Now the study shows that many of these other banks could be vulnerable to the same developments if a high percentage of worried customers start trying to withdraw their deposits.

“Our calculations suggest that these banks are certainly at potential risk of a run, absent further government intervention or recapitalization,” the economists wrote.

The study looked at the asset books of banks nationwide and found an estimated loss of $2 trillion in their market value.

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