Almost 200 banks could fail in the same way that SVB did: investigation
March 18, 2023 | 12:03
186 banks may be vulnerable to the same risks that doomed Silicon Valley Bank.
AFP via Getty Images
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.
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.