Hundreds of banks in the United States would be in danger of failing if they were hit by runs similar to the one that recently brought down Silicon Valley Bank, according to a study published Friday.
Economists at Stanford, University of Southern California, Columbia and Northwestern found that because of rising interest rates hurting the value of certain assets such as bonds, U.S. banks hold $2 trillion less in assets than they appear to have on paper. As a result, the study found, some banks would not survive a scenario in which many customers withdrew some or all of their uninsured deposits. These banks would find themselves in the position of Silicon Valley Bank, unable to cover mass withdrawals and subject to government takeover, researchers warn.
The study, which is based on data covering more than 4,800 U.S. banks, found that 1,619 banks would be at risk of failing if all their uninsured deposits were withdrawn. In a scenario where half of uninsured depositors withdraw their funds, 186 banks would be at risk, the study concluded.
“Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” researchers wrote.
SVB’s sudden collapse “was a shock” to the bank industry, said Erica Xuewei Jiang, lead author of the study and an economist at the University of Southern California’s Marshall School of Business.
“That was a sign that we didn’t realize how much of a problem this interest-raise rise was going to cause the banking sector,” Jiang said. “If all uninsured depositors are not going to run, the banking sector is going to be fine. But the question is when uninsured depositors are running on banks. Then there are some issues.”
The study could add more fuel to calls from midsize banks for the FDIC to insure all deposits, regardless of size, for the next two years. The FDIC insures deposits up to $250,000.
Jiang emphasized that the study was not intended to predict whether there will be additional bank runs, but rather lay out possible scenarios if they were to occur. The study also does not call out individual banks by name.
Instead it largely focuses on uninsured deposits because depositors with uninsured funds would be more motivated to withdraw their money if they believe it is not safe.
Without identifying any bank by name, the study found that of the 10 largest banks most at risk of a run, one has assets above $1 trillion; three have assets above $200 billion; three have assets above $100 billion; and the remaining three have assets above $50 billion.
In the case of Silicon Valley Bank, the study found it was not the worst capitalized bank in the country, nor was it the bank with the most unrecognized losses. What set it apart, researchers concluded, was a “disproportional share of uninsured funding.”
According to S&P Global, entities had $151.6 billion in uninsured deposits at Silicon Valley Bank, or 93.9 percent of the company’s total holdings. Many Silicon Valley Bank clients were technology firms with far more cash than could be insured.
The collapse of Silicon Valley Bank was followed by the failure of Signature Bank in New York. Subsequently, Wall Street’s biggest banks banded together to save another teetering bank, First Republic.
Nevertheless, the Federal Reserve has continued to raise interest rates, confident that the banking sector is stable.
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