March 18, 2023 | 12:03
186 banks could be vulnerable to the same risks that doomed Silicon Valley Bank.
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Nearly 200 more banks may be vulnerable to the same kind of risk that brought down Silicon Valley Bank: the value of the assets they own.
There are 186 banks across the country that could fail if half of their depositors quickly withdraw their funds, a new study published in the Social Science Research Network found. Even insured depositors, those with $250,000 or less in the bank, could have trouble getting their cash if these institutions face the kind of run Silicon Valley experienced a week ago.
The concern is that these banks hold a significant amount 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 when the Federal Reserve raised interest rates over the past year.
In the case of SVB, the Santa Clara, California-based institution invested much of its cash in long-term government bonds, which are ultra-safe in terms of losing the initial investment, but not worth as much as when SVB bought them. bought. , because interest rates have gone up since then. The bank had to sell some of those bonds to meet customer demands for withdrawals at less than what it paid for them, resulting in a loss of almost $2 billion.
When SVB disclosed that loss, along with a plan to raise an additional $500 billion from Wall Street, it sparked fears among its venture capital client base and tech startups that the bank was insolvent. In a panic fueled by social media, customers rushed to withdraw their money fearing the bank would run out of cash, a classic bank run.
The federal government stepped in to promise to support all depositors, not just those with the FDIC’s $250,000 limit, in an effort to stop a broader panic in which depositors began pulling money out of other banks that have about The same size.
Now the study shows that a large number of those other banks could be vulnerable to the same events if a high percentage of concerned customers start trying to withdraw their deposits.
“Our calculations suggest that these banks are indeed at potential risk of a run, absent further government intervention or recapitalization,” the economists wrote.
The study analyzed the asset books of banks across the country and found an estimated loss of $2 trillion in their market value.