Almost 200 banks may fail in the same way as SVB: study

Business

Factor: Matthew Sedacca

March 18, 2023 | at 12:03 p.m

Nearly 200 other banks may 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 withdraw their funds quickly, according to a new study published in the Social Science Research Network. Even insured depositors — those with $250,000 or less in the bank — could struggle to access their cash if those institutions face the kind of run Silicon Valley saw a week ago.

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

In SVB’s case, the Santa Clara, Calif.-based institution invested much of its cash in long-term government bonds, which are very safe from losing the initial investment but were not as valuable as when SVB bought them. , because interest rates have since risen. The bank had to sell some of those bonds to meet customer withdrawal demands at less than what it paid for them, resulting in a loss of nearly $2 billion.

When SVB revealed that loss, along with a plan to raise an additional $500,000 million from Wall Street, it sparked fears the bank was insolvent for its venture capital and technology platform clientele. In the panic fueled by social media, customers rushed to withdraw their money, worried that the bank would run out of cases – a classic bank run.

The federal government promised to support all depositors, not just those with the FDIC limit of $250,000, to stem a wider panic in which depositors began withdrawing money from other banks of roughly the same size.

Now research shows that many other banks could be vulnerable to the same development if a large number of worried customers start trying to withdraw their deposits.

“Our calculations suggest that these banks certainly have the potential to run away without further government intervention or recapitalization,” the economists wrote.

The study looked at banks’ asset books nationwide and found that their market value lost an estimated $2 trillion.