On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of bankruptcy even though only half of their depositors decide to withdraw their funds, a new study has found.
That’s because the Federal Reserve’s aggressive rate hikes to curb inflation have eroded the value of bank assets such as Treasuries and mortgage bonds.
“The recent declines in bank asset values very significantly increased the vulnerability of the US banking system to unsecured depositors,” economists wrote in a recent paper published on the Social Science Research Network.
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A run on those banks could pose a potential risk to self-insured depositors — those with $250,000 or less in the bank — as the FDIC’s deposit insurance fund begins to suffer losses, the economists wrote.
Of course, this scenario will only play out if the government does nothing.
“So our calculations suggest that these banks are certainly at potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
How did Silicon Valley Bank collapse?
In the case of Santa Clara-based Silicon Valley Bank, which held most of its assets in US Treasuries, the market value of its bonds fell as interest rates began to rise.
This is because most bonds pay a fixed interest rate that becomes more attractive if the interest rate falls, which drives up demand and the price of the bond.
But when interest rates rise, the lower fixed rate that a bond pays is no longer attractive to investors.
The timing coincided with the financial difficulties faced by many of the banks’ clients – mainly technology start-ups – which forced them to raise their deposits.
In addition, Silicon Valley Bank had a disproportionate share of unsecured funding, with only 1% of banks having higher unsecured leverage, the paper notes. “Together, losses and uninsured leverage provide incentives for an SVB uninsured depositor run.”
Swapna Venugopal Ramaswamy is the housing and economics correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and subscribe to our Daily Money newsletter here.