Nearly 200 banks could fail the same way SVB did: study
Nearly 200 more banks may 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 fail 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 — could have problems getting their cash if these institutions face the sort of run that Silicon Valley saw a week ago.
The concern is that these banks hold a significant amount of their assets in interest-rate sensitive financial instruments like government bonds and mortgage backed securities. The value of those older, low-interest investments dropped sharply as the Federal Reserve hiked interest rates over the past year.
In the case of SVB, the Santa Clara, California-based institution parked much of its cash in long-term government bonds, which are ultra-safe in terms of losing the initial investment, but were not worth as much as when SVB bought them, because interest rates have since gone higher. The bank had to sell off some of those bonds to meet customer demands for withdrawals at less than it paid for them, resulting in a nearly $2 billion loss.
When SVB disclosed that loss, along with a plan to raise an additional $500,000 million from Wall Street, it sparked fears among its venture capital and tech start-up-heavy customer base that the bank was insolvent. In a social media-fueled panic, customers rushed to withdraw their money out of concern that the bank would run out of case — a classic bank run.
The federal government stepped in to promise it would back all depositors, not only those with the FDIC-limit $250,000, in an effort to stop a wider panic where depositors started pulling money from other banks that are roughly the same size.
Now, the study shows that a slew of those other banks could be vulnerable to the same developments if a high percentage of worried customers start trying to withdraw their deposits.
“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
The study looked at banks’ asset books nationwide, and found an estimated $2 trillion loss in their market value.