Dozens of US banks at risk of repeating SVB collapse – study Many other lenders are also sitting on unrealized losses caused by the rapid rise i

Dozens of US banks at risk of repeating SVB collapse – study
Many other lenders are also sitting on unrealized losses caused by the rapid rise in interest rates

Nearly 200 American banks face similar risks to those that led to the implosion and bankruptcy of Silicon Valley Bank (SVB), according to a paper posted this week to the Social Science Research Network. SVB, a major US lender focused on the tech and startup sectors, was shut down by regulators last week after massive deposit outflows.

In the study, four economists from prominent US universities estimated how much market value the assets held by US banks have lost due to recent interest rate hikes.

“From March 07, 2022, to March 6, 2023, the federal funds rate rose sharply from 0.08% to 4.57%, and this increase was accompanied by quantitative tightening. As a result, long-dated assets similar to those held on bank balance sheets experienced significant value declines during the same period,” they wrote.

Although higher interest rates can benefit banks by allowing them to lend at a higher rate, many US banks have parked a significant portion of their excess cash in US Treasuries. This was done when interest rates were at near-zero levels. The value of these bonds has now greatly decreased due to the rate hikes – investors can now simply purchase newly issued bonds that offer a higher interest rate. The decline in the banks’ portfolios is unrealized, meaning the value of the securities has declined but the loss is still only ‘on paper’.

The problem arises when customers request their deposits back and banks are forced to sell their securities – at a significant loss – in order to pay depositors back. In extreme cases, this can lead to a bank becoming insolvent, or as happened with Silicon Valley Bank, the loss of confidence can trigger a bank run.

The report’s authors looked into how the amount of US lenders’ funding that comes from uninsured deposits: the greater the share, the more susceptible a bank is to a run. For instance, at SVB, where 92.5% of deposits were uninsured, the deposit outflow caused the bank to collapse in a span of only two days. The authors of the study calculated that 186 American banks do not have enough assets to pay all customers if even half of uninsured depositors decide to withdraw their money.

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