‘186 US banks at risk of Silicon Valley Bank-like collapse’

News Desk :
After the collapse of the Silicon Valley Bank, a new study has found that 186 US banks are at the risk of meeting a similar fate. The major reasons for this are rising interest rates and high proportion of uninsured deposits, said the report.
The Social Science Research Network study, named ‘Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?’, says that 186 banks could fail if even half of their uninsured depositors withdraw their funds.
“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,” says the report, reports NDTV.
The study also suggests that more banks could be at risk if uninsured deposit withdrawals cause even small fire sales.
The major concern for the studied banks is that they hold majority of their assets in government bonds and mortgage-backed securities, which are sensitive to interest rates. The value of those assets took a dip because of the recent rise in interest rates by the Federal Reserve.
The Silicon Valley Bank fell prey to these rising interest rates as it held much of its assets in long-term government bonds. These government bonds didn’t hold as much worth as when they were bought because they paid less then the current interest rate. To make up for the deposit withdrawal demand by customers, SVB sell off some of these assets at a loss of close to $2 Billion. The disclosure of these losses sparked fear among its customers, mostly comprising of tech start-ups, resulting in them withdrawing their money.
The report says that SVB wasn’t the worst capitalized bank and 10% of banks have lower capitalization than SVB. However, SVB had a significant amount of uninsured deposits.  
“Only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run,” said the report.
The report hints that 186 banks face a similar potential risk of failure if they don’t have any escape. “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalisation,” said the report.
“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,” the study’s abstract reads. “If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.”
The issue lies in the fact that the studied banks’ assets are in government bonds and mortgage backed securities, which were negatively affected by the Federal Reserve’s recent interest rate hikes, reports Fox News.
Many of SVB’s assets were long-term government bonds. Despite being a sound long-term investment, they were not worth as much as when SVB originally bought them. SVB invested too heavily in longer-term mortgage securities with more than 10 years to maturity.
SVB sold those bonds at a staggering $1.8 billion loss to meet customer withdrawals. When SVB disclosed that loss, depositors panicked and withdrew their money.
“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 study’s abstract concludes.
FOX Business has reached out to FDIC for comment, but has not received a statement.