DOZENS of banks in the United States are on the verge of collapse despite the Biden administration’s recent measures to calm the turbulent markets, according to a new study.
Nearly 200 American banks face similar risks to those that led to the implosion and bankruptcy of Silicon Valley Bank (SVB), said a study conducted by four economists.
SVB, a major US bank focused on lending capital to the tech and startup sectors, was shut down by regulators last week after massive deposit outflows, and a major run on the bank.
SVB, which has been a key lender to US startups since the 1980s, failed after depositors hurried to withdraw money over liquidity concerns.
The study estimated how much market value the assets held by US banks had lost due to higher interest rates.
‘From March 7th, 2022, to March 6th, 2023, the federal funds rate rose sharply from 0.08 per cent to 4.57 per cent, 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,’ stated the study by the four economists who hailed from prominent US universities, which was posted this week to the Social Science Research Network.
On the one hand, higher interest rates can benefit banks by allowing them to lend at a higher rate.
On the other hand, 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 now simply purchase newly issued bonds that offer a higher interest rate.
The decline in the banks’ portfolios is unrealised, meaning the value of the securities has declined but the loss is still only ‘on paper’.
For banks, the problem starts when customers request their deposits back and are forced to sell their securities – at a significant loss – in order to pay depositors back.
This can lead in extreme cases to a bank becoming insolvent or, as happened with SVB, the loss of confidence can trigger a bank run.
The authors of the report looked into the amount of US lenders’ funding that comes from uninsured deposits – the greater the share, the more susceptible a bank is to a run.
At SVB, for example, where 92.5 per cent of deposits were uninsured, the deposit outflow caused the bank to collapse in a span of only two days.
The study’s authors calculate that 186 American banks do not have enough assets to pay all customers if even half of the uninsured depositors decide to withdraw their money.