from The Epoch Times:
Nearly 200 more banks could be vulnerable to the same type of risk that collapsed Silicon Valley Bank (SVB) earlier this month, according to a recently published study.
There are 186 banks across the United States that could collapse if half of their respective uninsured depositors withdraw their funds, researchers with the Social Science Research Network found. Deposits at member banks of up to $250,000 are insured by the Federal Deposit Insurance Corp., although the agency agreed to insure depositors’ funds far above that after SVB’s collapse this month.
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“Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run,” an abstract of the paper reads. “We compute similar incentives for the sample of all U.S. banks. 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.
“If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.”
Insured depositors of those banks could also see problems trying to withdraw their cash if those financial institutions face a bank run, the paper’s authors (pdf) say. The researchers noted that those banks hold a large amount of their assets in government bonds and mortgage-backed securities, which are highly reactive to interest rates that have been raised significantly over the past year by the Federal Reserve.
“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
Their study evaluated banks’ asset books around the United States, finding an estimated $2 trillion discrepancy in their overall market value. It also noted that uninsured depositors are a major source of funding for commercial banks and account for about $9 trillion of their liabilities, meaning that bank runs on these institutions could present a “significant risk.”
“As interest rates rise, the value of a bank’s assets can decline, potentially leading to bank failure through two broad, but related channels,” they wrote. “First, if a bank’s liabilities exceed the value of its assets, it may become insolvent. This is particularly likely for banks which need to increase deposit rates as interest rates rise. Second, uninsured depositors may become concerned about potential losses and withdraw their funds, causing a run on the bank.”