On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.
That is because the Federal Reserve’s aggressive interest rate hikes to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.
“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” economists wrote in a recent paper published on the Social Science Research Network.
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A run on these banks could pose potential risk to even insured depositors — those with $250,000 or less in the bank — as the FDIC’s deposit insurance fund starts incurring losses, the economists wrote.
Of course, this scenario will only play out of if the government does nothing.
“So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
How did Silicon Valley Bank collapse?
In the case of the Santa Clara-based Silicon Valley Bank, which held most of its assets in U.S. government bonds, the market value of its bonds went down when interest rates started going up.
That’s because most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond.
However, when interest rates rise, the lower fixed interest rate paid by a bond is no longer attractive to investors.
The timing coincided with the financial difficulties many of the banks’ customers – largely tech start-ups – were dealing with, forcing them to withdraw their deposits.
In addition, Silicon Valley Bank had a disproportional share of uninsured funding, with only 1% of banks having higher uninsured leverage, the paper notes. “Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.