Key Takeaways:




When SVB’s position was compared to other participants, it became clear that nearly 190 American banks may be vulnerable to a run.



The economists assessed specific US institutions during the Federal Reserve’s rapid rate-hike campaign.




The demise of Silicon Valley Bank was caused by a perfect storm of losses, uninsured leverage, and a more extensive lending portfolio, among other things. When SVB’s position was compared to other participants, it became clear that nearly 190 American banks may be vulnerable to a run.



While the SVB failure served as a reminder of the conventional financial system’s vulnerability, recent research by economists revealed that many banks are only a few unsecured deposit withdrawals far from a catastrophic collapse. It said:




“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.”




The economists assessed specific US institutions during the Federal Reserve ‘s rapid rate-hike campaign. They evaluated loss in market worth and asset books. Mortgage loans and Treasury notes are examples of assets whose worth can decrease. When new bonds have greater interest rates, this occurs. The funding proportions of the institutions were also examined by economists. They concentrated on uninsured depositors who held over $250,000 in accounts and provided the money.



Their results point to a possible issue. Insured depositors might experience impairments if half of these uninsured depositors quickly withdraw money from any of these 186 US institutions. This is because not enough assets are accessible to cover all depositors. In such circumstances, FDIC action might be required.



In turn, this could result in bank losses due to central banks’ monetary strategies negatively affecting long-term assets like mortgages and government bonds. According to the report, a bank is deemed bankrupt if the mark-to-market value of its assets is inadequate to cover the repayment of all insured deposits after paying all uninsured depositors. The research came to the following conclusions:




“Recent declines in bank asset values significantly increased the fragility of the US banking system to uninsured depositors runs,” 




The stability of the US banking system is threatened by the recent increase in interest rates, which reduced the market value of assets by $2 trillion and a sizable portion of uninsured deposits at some US institutions.



President Joe Biden promised that there would be no impact on tax-paying citizens as the federal government intervenes to safeguard the depositors of SVB and Signature Bank.