Study finds 186 banks vulnerable to SVB-like collapse
The study created a scenario where half of 186 banks' depositors withdrew their funds
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RBC Capital Markets head of U.S. equity strategy Lori Calvasina discusses the state of the U.S. economy in the aftermath of the Silicon Valley Bank collapse and ahead of the Federal Reserve March meeting.
A new study says that, depending on certain market conditions, nearly 200 U.S. banks could be vulnerable to the same fate as Silicon Valley Bank (SVB).
A recent Social Science Research Network study suggests that 186 American banks could fail if half of their depositors suddenly withdrew their funds. The researchers formulated a speculative scenario in which each bank experienced a run, and concluded that the FDIC would run out of money.
The study was published shortly after the collapse of SVB, the worst American financial institution failure since 2008.
"Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization," the economists wrote.
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SANTA CLARA, CALIFORNIA - MARCH 10: The Silicon Valley Bank (SVB) logo is seen through a rain covered window in front of the SVB headquarters on March 10, 2023 in Santa Clara, California. (Justin Sullivan/Getty Images / Getty Images)
"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.
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SANTA CLARA, CALIFORNIA - MARCH 10: A worker (C) tells people that the Silicon Valley Bank (SVB) headquarters is closed on March 10, 2023 in Santa Clara, (Justin Sullivan/Getty Images / Getty Images)
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.
People line up outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, (Photo by Justin Sullivan/Getty Images / Getty Images)
"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.
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FOX Business has reached out to FDIC for comment, but has not received a statement.