A new study states that depending on certain market conditions almost 200 US banks could meet the same fate as Silicon Valley Bank (SVB).
A recently Social Science Research Network study suggests that 186 American banks could fail if half their depositors suddenly withdrew their funds. The researchers formulated a speculative scenario in which each bank experienced a run and concluded that the FDIC would run out of money.
The study was released shortly after the SVB collapse, the worst failure of a US financial institution since 2008.
“Our calculations suggest that without further government intervention or recapitalizations, these banks are certainly at potential run risk,” the economists wrote.
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“Even if only half of uninsured depositors decide to withdraw, nearly 190 banks face a potential risk of impaired insured depositors, with potentially $300 billion in insured deposits at risk,” the study’s executive summary said . “If uninsured deposit withdrawals cause even small distress sales, many more banks are at risk.”
The problem lies in the fact that the assets of the banks surveyed are invested in government bonds and mortgage-backed securities, which have been negatively impacted by the Federal Reserve’s recent rate hikes.
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Many assets of the SVB were long-term government bonds. While they were a solid long-term investment, they weren’t worth as much as when SVB originally bought them. The SVB over-invested in longer-term mortgage securities with maturities of more than 10 years.
SVB sold these bonds at a staggering $1.8 billion loss to cover customer withdrawals. When the SVB disclosed this loss, depositors panicked and withdrew their money.
“Taken together, these calculations suggest that the recent decline in bank assets has significantly increased the vulnerability of the US banking system to uninsured depositors.” closes the summary of the study.
FOX Business has reached out to the FDIC for comment but has received no comment.
Source : finance.yahoo.com