Recently, 186 banks were recognized as being at risk. These banks are dealing with problems akin to those that led to Silicon Valley Bank’s demise. Due to rising interest rates depleting the bank’s assets, SVB fell earlier this week. Customers became scared and withdrew their unsecured deposits as a result.
The experts assessed specific U.S. banks throughout the Federal Reserve’s rapid rate-hike campaign. They evaluated the decrease in market value and asset books. Mortgage loans and Treasury notes are examples of assets whose value might decline. When new bonds have higher interest rates, this occurs. Economists also examined the financing proportions of the banks. They concentrated on uninsured depositors who held over $250,000 in accounts and provided the funds.
These findings point to a possible issue. Even insured depositors may experience impairments if half of these uninsured depositors quickly withdraw money from any of these 186 U.S. institutions. This is because not enough assets are available to cover all depositors. In such circumstances, FDIC involvement could be required.
It is important to recognize a key study restriction. Hedging tactics are not taken into account in the study. These methods might protect several institutions from increasing interest rates.
In their paper, the economists stated: “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”