Following the collapse of Silicon Valley Bank earlier this month, 186 more banks are at risk of collapse even if just half of their depositors decide to withdraw their funds, a new one learn has found.
That’s because the Federal Reserve’s aggressive rate hikes to curb inflation have undermined the value of bank assets like government bonds and mortgage-backed securities.
“The recent decline in bank assets has very significantly increased the vulnerability of the US banking system to uninsured depositors,” economists wrote in a recent article published in the Social Science Research Network.
SVB: Silicon Valley Bank collapse explained in graphs
GRAPHIC: Ripple Effect: How the Silicon Valley Bank Collapse Affects Other US Banks
A run on these banks could pose a potential risk even for insured depositors — those with $250,000 or less in the bank — as the FDIC’s Deposit Insurance Fund begins to make losses, the economists wrote.
Of course, this scenario will only play out if the government does nothing.
“Thus, our calculations suggest that without further government intervention or recapitalizations, these banks are certainly at potential run risk,” the economists wrote.
How Did the Silicon Valley Bank Collapse?
In the case of the Santa Clara-based Silicon Valley Bank, which held most of its assets in US Treasuries, the market value of its bonds fell when interest rates began to rise.
That’s because most bonds pay a fixed interest rate that becomes more attractive as interest rates fall, driving up demand and the price of the bond.
However, when interest rates rise, the lower fixed rate on a bond is no longer attractive to investors.
The timing coincided with the financial difficulties faced by many of the banks’ clients – mostly tech startups – forcing them to withdraw their deposits.
Additionally, Silicon Valley Bank had a disproportionate 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 run on uninsured depositors.”
Swapna Venugopal Ramaswamy is the housing and business correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
This article originally appeared on USA TODAY: According to a new study, almost 190 new banks could fail after the collapse of the SVB
Source : finance.yahoo.com