A new study: Nearly 190 banks may face the fate of Silicon Valley Bank

A new study: Nearly 190 banks may face the fate of Silicon Valley Bank

In the wake of the Silicon Valley bank collapse earlier this month, a new study finds that 186 more banks are at risk of failure even if only half of the depositors decide to withdraw their money.

This is because the Federal Reserve's sharp increases in interest rates to curb inflation have eroded the value of banking assets such as government bonds and mortgage-backed securities.

"Recent declines in bank asset values have greatly increased the vulnerability of the US banking system to the operations of uninsured depositors," the economists wrote in a paper recently published in the Social Science Research Network.

Economists wrote that the run on these banks could pose potential risks even to insured depositors — those with $250,000 or less in the bank — as the FDIC's Deposit Insurance Fund begins to incur losses.

Naturally, this scenario will only work if the government does nothing.

"So our calculations indicate that these banks are certainly at potential risk of running out, absent further government intervention or recapitalization," the economists wrote.

How did the Silicon Valley bank collapse?

In the case of the Santa Clara-based Silicon Valley bank, which holds most of its assets in US government bonds, the market value of its bonds plummeted when interest rates started to rise.

This is because most bonds pay a fixed interest rate which becomes more attractive if interest rates fall, driving up demand and the bond price.

However, when interest rates rise, the low fixed rate of interest that a bond pays is no longer attractive to investors.

The timing coincided with the financial difficulties many of the bank's clients — largely tech start-ups — were dealing with, forcing them to withdraw their deposits.

Additionally, the paper notes that Silicon Valley banks had a disproportionate share of uninsured financing, with only 1% of banks having higher uninsured leverage. "Uninsured losses and leverage combined provide incentives for the operation of an SVB-uninsured depositor."

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