A new report found that 186 banks in the US are at risk of failure due to rising interest rates and a high proportion of uninsured deposits. The research posted on the Social Science Research Network titled 'Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? The Federal Reserve's rate-increasing campaign has resulted in the loss of individual banks' assets. When new bonds have higher rates, assets such as Treasury notes and mortgage loans can decrease in value.
The study also looked at the proportion of banks' funding coming from uninsured depositors with accounts worth over $250,000.
If half of the uninsured depositors withdrew their funds from these 186 banks, the banks wouldn't have enough assets to make all depositors whole, which may lead to impairments for the uninsured depositors. The paper says that this could cause the FDIC to step in.
However, the research does not consider hedging, which may protect banks against rising interest rates.
Nearly 190 banks have a potential risk of impairment for insured depositors, with potentially $300 billion of insured deposits at risk, even if only half of the uninsured depositors decide to withdraw. If uninsured deposit withdrawals cause small fire sales, substantially more banks are at risk, according to the report.
The failure of the Silicon Valley Bank is an example of the risks posed by rising interest rates and uninsured deposits. The bank's assets lost value due to the rate increases, and worried customers withdrew their uninsured deposits. The bank was forced to close because of its failure to meet its obligations to its depositors.
The economists who conducted the study said that these 186 banks are at risk of a similar fate without government intervention or recapitalization. The findings highlight the importance of careful risk management and diversification of funding sources for banks to ensure their stability in the face of market fluctuations.
Silicon Valley Bank, once a prominent player in the banking industry, collapsed after struggling to cope with rising yields that eroded the value of its assets. The bank was shut down by Californian regulators last Friday, and the Federal Deposit Insurance Corporation FDIC was appointed receiver. This is the largest bank failure since the financial crisis of 2008 when Washington Mutual went bust.
Silicon Valley Bank tried to recover from its losses by selling a portfolio of treasuries and mortgage-backed securities to Goldman Sachs at a loss of $1.8 billion. It failed to raise $2.25 billion in common equity and preferred convertible stock to plug the hole. In just one day, the bank's clients became increasingly worried and withdrew their deposits, causing $42 billion in outflows.
In an effort to salvage its businesses, Silicon Valley Bank announced earlier this week that it was exploring strategic alternatives for its holding company, SVB Capital, and SVB Securities.
The company said that the funds and general partner entities of SVB Securities and SVB Capital were not included in the Chapter 11 filing. The company said it planned to continue the process to evaluate alternatives for its businesses, as well as its other assets and investments.