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Almost 200 banks could fail in the same way that SVB did: investigation


March 18, 2023 | 12:03

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

There are 1[ads1]86 banks nationwide that could fail if half of their depositors withdraw their money quickly, a new study published on the Social Science Research Network found. Even insured depositors — those with $250,000 or less in the bank — could have trouble getting their money 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 the older, low-interest investments fell sharply when the Federal Reserve raised interest rates last year.

In SVB’s case, the Santa Clara, Calif.-based institution parked much of its cash in long-term government bonds, which are ultra-safe in terms of losing the original investment but weren’t worth as much as when SVB bought them. , because interest rates have since gone higher. The bank had to sell some of these bonds to meet customer withdrawal demands for less than it paid for them, resulting in a loss of nearly $2 billion.

Many of the exposed banks keep depositors’ cash in long-term assets such as bonds and mortgages.

When SVB disclosed this loss, along with a plan to raise another $500,000 million from Wall Street, it sparked fears among its venture capital and technology-heavy client base that the bank was insolvent. In a panic fueled by social media, customers rushed to withdraw their money out of concern that the bank would run out of business – a classic bank run.

The federal government stepped in to promise that it would support all depositors, not just those with the $250,000 FDIC limit, in an effort to stop a larger panic in which depositors began withdrawing money from other banks of roughly the same size.

Now the study shows that a number of the other banks could be vulnerable to the same development 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 other government intervention or recapitalization,” the economists wrote.

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

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