Almost 200 banks could fail in the same way as SVB did: investigation

Business

By Matthew Sedacca

March 18, 2023 | 12:03

Nearly 200 more banks could be vulnerable to the same type of risk that took down Silicon Valley Bank: The value of the assets they hold.

There are 186 banks across the country that could go bankrupt if half of their depositors quickly withdraw their funds, a new study published on the Social Science Research Network found. Even insured depositors — those with $250,000 or less in the bank — may have trouble getting their cash if those institutions face the kind of run Silicon Valley saw a week ago.

The concern is that these banks hold a significant portion of their assets in interest rate sensitive financial instruments such as government bonds and mortgage bonds. The value of these older, low-interest investments fell sharply as the Federal Reserve raised interest rates over the past year.

In the case of SVB, the Santa Clara, Calif.-based institution parked much of its cash in long-term government bonds, which are ultra-safe against losing the original investment but weren’t worth as much as when SVB bought them, because interest rates the site has increased. The bank had to sell some of those bonds to meet customer demands for withdrawals for less than it paid for them, resulting in a loss of nearly $2 billion.

When SVB disclosed that loss, along with a plan to raise another $500,000 million from Wall Street, it sparked fears among its venture capital and technology start-up heavy client base that the bank was insolvent. In a panic fueled by social media, customers rushed to withdraw their money out of concern that the bank would run out of business – a classic bank run.

The federal government stepped in to promise that it would support all depositors, not just those with the FDIC limit of $250,000, in an effort to stem a broader panic in which depositors began withdrawing money from other banks that are roughly same size.

Now the study shows that a number of the other banks may be vulnerable to the same development if a high percentage of worried customers start trying to withdraw their deposits.

“Our calculations suggest that these banks are certainly at potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.

The study looked at the assets of banks across the country and found an estimated loss of $2 trillion in their market value.