RT.com
18 Mar 2023, 19:43 GMT+10
Many other lenders are also sitting on unrealized losses caused by the rapid rise in interest rates
Nearly 200 American banks are facing risks similar to what led to the implosion and bankruptcy of Silicon Valley Bank (SVB), according to a paper posted this week to the Social Science Research Network. SVB, a major US lender focused on the tech and startup sectors, was shut down by regulators last week after massive deposit outflows.
In the study, four economists from prominent US universities estimated how much market value the assets held by US banks have lost due to the recent interest rate hikes.
"From March 07, 2022, to March 6, 2023, the federal funds rate rose sharply from 0.08% to 4.57%, 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," they wrote.
Although higher interest rates can benefit banks by allowing them to lend at a higher rate, 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 simply purchase newly issued bonds that offer a higher interest rate. The decline in the banks' portfolios is unrealized, meaning the value has declined but the loss is still only 'on paper'.
The problem arises when customers request their deposits back and banks are forced to sell their securities - at a significant loss - in order to pay depositors back. In extreme cases, this can lead to a bank becoming insolvent, or as happened with Silicon Valley Bank, the loss of confidence this circumstance engenders can trigger a bank run.
The report's authors looked into the ratio of US lenders' funding from uninsured deposits: the greater the share of uninsured deposits, the more susceptible a bank is to a run. For instance, at SVB, where 92.5% of deposits were uninsured, the deposit outflow caused the bank to collapse in a span of only two days. The authors of the study calculated that 186 American banks do not have enough assets to pay all customers if even half of uninsured depositors decide to withdraw their money.
"Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization... 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 economists concluded, noting that the number of banks at risk could be "significantly" larger if "uninsured deposit withdrawals cause even small fire sales."
SVB's failure sent ripples across the entire US banking industry and caused the closure of another lender, Signature Bank. Many other financial institutions have seen their stocks plunge, with the six largest Wall Street banks losing around $165 billion in market capitalization, or some 13% of their combined value. Earlier this week, the ratings agency Moody's downgraded its outlook for the US banking system from 'stable' to 'negative', citing the "rapidly deteriorating operating environment."
For more stories on economy & finance visit RT's business section
(RT.com)
Get a daily dose of Afghanistan Sun news through our daily email, its complimentary and keeps you fully up to date with world and business news as well.
Publish news of your business, community or sports group, personnel appointments, major event and more by submitting a news release to Afghanistan Sun.
More InformationENNIS, Texas: A man died, and three of his family members were injured when their RV flipped several times during a strong storm at...
One halcyon spring day in 1903, the 69-year-old anatomist and naturalist Dr. James Bell Pettigrew sat at the top of a sloping street...
WEST PALM BEACH, Florida: Air Force fighter jets have stopped a civilian plane that entered restricted airspace near Donald Trump's...
CHICAGO/WASHINGTON, D.C.: Farmers and food groups across the U.S. are laying off workers, stopping investments, and struggling to get...
SIOUX FALLS, South Dakota: A new South Dakota law banning the use of eminent domain for carbon capture pipelines has cast doubt on...
WASHINGTON, D.C.: Officials working on diversity and inclusion programs at the U.S. Office of the Director of National Intelligence...
New Delhi [India], March 14 (ANI): India has strongly denied suggestions made by the Pakistan foreign office that India had a hand...
(250314) -- NIS, March 14, 2025 (Xinhua) -- Hu Meiyi (R) of China competes against Chuthamat Raksat of Thailand during the elite women...
Islamabad [Pakistan], March 14 (ANI): Talks between Afghan and Pakistani jirgas to resolve the 19-day Torkham border dispute collapsed...
The Afghan Taliban have rejected Pakistan's allegation that Tuesday's deadly hostage-taking of a train was planned and directed from...
New Delhi [India], March 14 (ANI): Indian all-rounder Axar Patel continued his fine run in ICC white-ball events, contributing plenty...
New Delhi [India], March 13 (ANI): India closed out a remarkable campaign at the World Para Athletics Grand Prix 2025, finishing at...