RT.com
19 Mar 2023, 00:13 GMT+10
Many other lenders are also sitting on unrealized losses caused by the rapid rise in interest rates
Nearly 200 American banks are facing risks similar to what led to the implosion and bankruptcy of Silicon Valley Bank (SVB), according to a paper posted this week to the Social Science Research Network. SVB, a major US lender focused on the tech and startup sectors, was shut down by regulators last week after massive deposit outflows.
In the study, four economists from prominent US universities estimated how much market value the assets held by US banks have lost due to the recent interest rate hikes.
"From March 07, 2022, to March 6, 2023, the federal funds rate rose sharply from 0.08% to 4.57%, and this increase was accompanied by quantitative tightening. As a result, long-dated assets similar to those held on bank balance sheets experienced significant value declines during the same period," they wrote.
Although higher interest rates can benefit banks by allowing them to lend at a higher rate, many US banks have parked a significant portion of their excess cash in US Treasuries. This was done when interest rates were at near-zero levels. The value of these bonds has now greatly decreased due to the rate hikes - investors can simply purchase newly issued bonds that offer a higher interest rate. The decline in the banks' portfolios is unrealized, meaning the value has declined but the loss is still only 'on paper'.
The problem arises when customers request their deposits back and banks are forced to sell their securities - at a significant loss - in order to pay depositors back. In extreme cases, this can lead to a bank becoming insolvent, or as happened with Silicon Valley Bank, the loss of confidence this circumstance engenders can trigger a bank run.
The report's authors looked into the ratio of US lenders' funding from uninsured deposits: the greater the share of uninsured deposits, the more susceptible a bank is to a run. For instance, at SVB, where 92.5% of deposits were uninsured, the deposit outflow caused the bank to collapse in a span of only two days. The authors of the study calculated that 186 American banks do not have enough assets to pay all customers if even half of uninsured depositors decide to withdraw their money.
"Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization... Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs," the economists concluded, noting that the number of banks at risk could be "significantly" larger if "uninsured deposit withdrawals cause even small fire sales."
SVB's failure sent ripples across the entire US banking industry and caused the closure of another lender, Signature Bank. Many other financial institutions have seen their stocks plunge, with the six largest Wall Street banks losing around $165 billion in market capitalization, or some 13% of their combined value. Earlier this week, the ratings agency Moody's downgraded its outlook for the US banking system from 'stable' to 'negative', citing the "rapidly deteriorating operating environment."
For more stories on economy & finance visit RT's business section
(RT.com)
Get a daily dose of Oklahoma Star news through our daily email, its complimentary and keeps you fully up to date with world and business news as well.
Publish news of your business, community or sports group, personnel appointments, major event and more by submitting a news release to Oklahoma Star.
More InformationUVLADE, Texas: Texas police stopped a Florida-bound freight train this week and discovered two migrants had died in a freight ...
ROLLING FORK, Mississippi: A powerful tornado has struck Mississippi, killing at least 25 people, injuring dozens, flattening entire blocks and ...
TEGUCIGALPA, Honduras: In what could signal the end of his country's decades-long relations with Taiwan, Honduran foreign minister Eduardo Enrique ...
WASHINGTON D.C.: A new US Congressional committee focusing on China held its second hearing on the alleged abuses of the ...
SAN FRANCISCO, California: A new round of extreme winter weather that hit California, also drifted into neighboring Southwest states, with ...
WASHINGTON D.C.: After several high-profile near collision incidents, the US Federal Aviation Administration (FAA) has issued a safety alerts to ...
BEIJING, California: As the world's second-largest economy is still struggling to fully recover from the long-term effects of COVID-19, most ...
NEW YORK, New York - Bank shares were being bought up on Monday as U.S. industrial stocks kicked the week ...
WASHINGTON D.C.: To address summer airport congestion and low air traffic controller staffing levels, the Federal Aviation Administration (FAA) said ...
OTTAWA, Canada: After a meeting between Canadian Prime Minister Justin Trudeau and US President Joe Biden, Ottawa has pledged to ...
NEW YORK CITY, New York: Deposits at small U.S. banks throughout the country dropped the most since 2007 after the ...
DETROIT, Michigan: In a briefing for investors and analysts this week, Ford Motor Co. reported that while its electric vehicle ...