Nearly 200 banks could fail the same way SVB did: study

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by Matthew Sedaka

March 18, 2023 | 12:03 p.m

Nearly 200 other banks may be exposed to the same kind of risk that led to the collapse of the Silicon Valley bank: the value of the assets they held.

There are 186 banks across the country that could fail if half of their depositors quickly withdraw their money, A new study has been 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 experience the kind 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 such as government bonds and mortgage-backed securities. The value of those old, low-interest investments has fallen sharply as the Federal Reserve has raised interest rates over the past year.

In the case of SVB, the Santa Clara, California corporation has stored a lot of its money in long-term government bonds, which is very safe in terms of losing the initial investment, but it wasn’t worth it when SVB bought it, because interest rates have since gone up. The bank was forced to sell some of these bonds to meet customer withdrawal requests for less than it paid them, resulting in a loss of nearly $2 billion.

When SVB disclosed this loss, along with a plan to raise an additional $500,000 million from Wall Street, it sparked concerns among its venture capital and emerging technology customer base that the bank was insolvent. In a panic sparked by social media, customers rushed to withdraw their money, fearing the bank’s case would run out – a traditional bank operation.

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

Now, the study shows that a large number of those other banks could be vulnerable to the same developments if a high percentage of anxious customers started trying to withdraw their deposits.

“Our calculations indicate that these banks are certainly at potential risk of running out, absent further 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.