Report says SVB was not the worst capitalized bank (Representational)
Following the collapse of a Silicon Valley bank, a new study finds that 186 US banks are at risk of meeting the same fate. The main reasons for this are rising interest rates and high proportion of uninsured deposits, the report said.
The Social Science Research Network study, titled ‘Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Run?
The report states, “Even if only half of uninsured depositors decide to withdraw, about 190 banks are at potential risk of loss for insured depositors, potentially $300 billion in insured deposits.” The amount is at risk.”
The study also suggests that even smaller fire sales could put more banks at risk if uninsured deposit withdrawals occur.
The major concern for the banks studied is that they hold most of their assets in government bonds and mortgage-backed securities, which are sensitive to interest rates. Those assets declined in value due to a recent increase in interest rates by the Federal Reserve.
Silicon Valley Bank became a victim of these rising interest rates because it held most of its assets in long-term government bonds. These government bonds were not worth as much as they were when they were purchased because they paid less than the current interest rate. To meet customer withdrawal demands, SVB sold some of these assets at a loss of approximately $2 billion. The disclosure of these losses caused panic among its customers, mostly tech start-ups, resulting in them withdrawing their money.
The report said that SVB was not the worst capitalized bank and 10% of the banks have capitalization less than SVB. However, SVB had a large amount of uninsured deposits. “Only 1 percent of banks had excess uninsured leverage. Combined, losses and uninsured leverage provide an incentive to run an SVB uninsured depositor,” the report said.
The report indicates that 186 banks are at an equal potential risk of failure if they do not have an escape route. “Our calculations suggest that these banks are certainly at potential risk of run, absent other government intervention or recapitalization,” the report said.