Nearly 200 US banks could collapse like Silicon Valley Bank, warns study

Around 200 American banking institutions are susceptible to suffering the same fate as Silicon Valley Bank last week, according to a new study.

If half of the American banks' depositors abruptly withdrew their funds, 186 of them would be in danger of failing like SVB, warned the study published on Monday.

Without additional government involvement or recapitalization, "our calculations suggest these banks are certainly at a potential risk of a run," according to the analysis.

Although the US government protects bank deposits up to $250,000, the report asserts that these at-risk banks have a significant proportion of uninsured depositors who are more likely to withdraw their money out of fear of losing it.

Nearly 190 institutions might possibly be in danger of impaired insured depositors "with potentially $300 billion of insured deposits at risk," read the study abstract.

"If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk."

The problem is that the assets of the examined banks are made up primarily of mortgage-backed securities and government bonds, both of which have been adversely impacted by recent interest rate increases by the Federal Reserve.

The fall of SVB and the ripple effect 

The regulators forced SVB to close its doors and take deposits last week, marking the second-largest banking collapse in American history and the biggest since the 2008 financial crisis.

In under 48 hours, the bank's 40-year reign came to an end as a result of a panic that was sparked by the venture capital community that SVB had fostered and served.

The failure of three major players in three days created havoc in the American banking industry. 

Silvergate Capital, based in California, was the first to suffer, announcing that it had entered voluntary liquidation after incurring losses of $1 billion (A$1.5 billion) in the previous quarter, sending its shares down 67%. 

Less than 24 hours later, SVB, the country's 18th largest bank, went into receivership. It was the largest bank failure in US history and the worst since the Great Recession. 

Following the failure of New York-based Signature Bank, the third American bank failure in as many days occurred.

The paper was released soon after SVB's demise.

Study Abstract:

We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. 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. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. 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.