Rising interest rates, which brought down the U.S. banking system’s asset market value by $2 trillion, combined with a large share of uninsured deposits at some U.S. banks, threaten banks’ stability.
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The perfect mix of losses, uninsured leverage and an extensive loan portfolio, among other factors, resulted in the fall of Silicon Valley Bank (SVB). Comparing SVB’s situation with other players revealed that nearly 190 banks operating in the United States are potentially at risk of a run.
While SVB’s collapse came as a reminder of the fragility of the traditional financial system, a recent analysis by economists showed that a large number of banks are at risk from uninsured deposit withdrawals. It read:
“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”
Monetary policies penned down by central banks can hurt long-term assets such as government bonds and mortgages, creating losses for banks. The report explains that a bank is considered insolvent if the mark-to-market value of its assets — once uninsured depositors are paid — is insufficient to repay all insured deposits.
The data in the above graph represents the assets based on bank call reports as of Q1, 2022. Banks in the top right corner, alongside SVB (with assets of $218 billion), have the most severe asset losses and the largest percentage of uninsured deposits to mark-to-market assets.
The recent rise in interest rates, which brought down the U.S. banking system’s asset market value by $2 trillion, combined with a large share of uninsured deposits at some U.S. banks, threatens banks’ stability.
“Recent declines in bank asset values significantly increased the fragility of the US banking system to uninsured depositors runs,” the study concluded.
Related: Breaking: SVB Financial Group files for Chapter 11 bankruptcy
As the federal government steps in to protect the depositors of SVB and Signature Bank, President Joe Biden assured no impact on taxpaying citizens.
Thanks to actions we’ve taken over the past few days to protect depositors from Silicon Valley and Signature Banks, Americans can have confidence that our system is safe.
People’s deposits will be there when they need them – at no cost to the taxpayer.
— President Biden (@POTUS) March 13, 2023
However, one user pointed out to Biden on Twitter that “everything you do or touch costs the taxpayer!”
Analysis from Silicon Valley Bank (SVB) has revealed that more than 186 banks in the United States are at risk of imminent collapse, a figure more than double the number published in the bank’s previous report.
This alarming trend has come to light as a result of an in-depth review of bank financials conducted by SVB analysts. Based on their analysis, there are 186 small and mid-sized US banks with high operating risk, meaning that they lack the reserves and liquidity to weather challenging economic times. In addition, most of the banks are dangerously over-leveraged and have low capital levels.
This is particularly concerning given the current economic climate, in which the COVID-19 pandemic is taking its toll on businesses of all sizes. The analysis concluded that the banks at risk are concentrated in the Mid-West, with Illinois, Ohio, and Michigan particularly exposed.
The analysis highlights the importance of stringent financial regulations to ensure the stability of the banking sector. Without these in place, it can be difficult for banks to assess the true risk of lending, which in turn can cause the instability of banks, leading to the collapse of the financial system.
The analysis also raises questions about whether banks are doing enough to strengthen their balance sheets when it comes to risks such as cyber attacks or financial fraud. If a bank is not carefully monitoring potential risks, it can be disastrous for both its customers and the banking sector as a whole.
In light of this analysis, all banks should take action to strengthen their financial position and build more resilience. This includes increasing liquidity reserves and improving risk management, as well as implementing more stringent financial regulations and compliance procedures. By doing so, the banking sector can limit the damage inflicted by further crises and preserve its stability.