Nearly 200 banks could go bankrupt in the same way as the SVB: study

Company

By means of Matthew Sedaca

March 18, 2023 | 12:03 am

Nearly 200 additional 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 go out of business if half of their depositors quickly withdraw their money, 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 Silicon Valley saw a week ago.

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

In the case of SVB, the Santa Clara, California-based institution parked much of its money in long-dated government bonds, which are extremely safe in terms of losing the initial investment, but are not worth as much as when SVB bought them, as interest rates have since fallen. increased. The bank had to sell some of those bonds to meet customer demand for withdrawals at less than it paid for them, resulting in a loss of nearly $2 billion.

When SVB announced that loss, along with a plan to raise another $500,000 million from Wall Street, it sparked fears among the venture capital and tech start-up customer base that the bank was insolvent. In a social media-fueled panic, customers rushed to withdraw their money for fear the bank would run out of business — a classic bank run.

The federal government stepped in to pledge to support all depositors, not just those with the $250,000 FDIC limit, in an effort to stem a wider panic that saw depositors begin to withdraw money from other banks about the same size .

Now the research shows that a large number of those other banks could be vulnerable to the same developments if a high percentage of concerned customers start trying to withdraw their deposits.

“Our calculations suggest that these banks are certainly at potential risk of a run, without other government intervention or recapitalization,” the economists wrote.

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