About 190 lenders may face SVB’s fate

A recent study has found that 186 US banks are at risk of failure due to the Federal Reserve’s aggressive interest rate hikes. The hike was aimed to curb inflation, but it has eroded the value of banks’ assets, including mortgage-backed securities and government bonds. The study revealed that a run on these banks could cause potential risks for even insured depositors, those with $250,000 or less in the bank, as the FDIC’s deposit insurance fund would start incurring losses. The economists wrote that if the government does nothing, then these banks are certainly at potential risk of a run.

The collapse of Santa Clara-based Silicon Valley Bank is an example of this scenario. The bank held most of its assets in US government bonds. When interest rates started going up, the market value of its bonds went down as the fixed interest rate paid by a bond was no longer attractive to investors. This coincided with financial difficulties many of the bank’s customers, which were mainly tech start-ups, were experiencing, and this forced them to withdraw their deposits. Silicon Valley Bank also had a disproportional share of uninsured funding, with only 1% of banks having higher uninsured leverage, the paper notes.

The economists who conducted the study argued that the recent decline in bank asset values has significantly increased the fragility of the US banking system to uninsured depositor runs. Furthermore, a run on these banks could pose potential risk to even insured depositors as the FDIC’s deposit insurance fund starts incurring losses. They concluded that government intervention or recapitalization is necessary to prevent potential runs on these banks.