After the demise of Silicon Valley Bank and Signature Bank in March and First Republic Bank in April, a study on the fragility of the U.S. banking system found that 183 more banks are at risk of failure even if only half their uninsured depositors—those with deposits greater than $250,000—decide to withdraw their funds, USA Today reported.
“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” economists wrote in a recent paper published on the Social Science Research Network. “So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”
Regional banks are failing because the Federal Reserve’s aggressive interest rate hikes to clamp down on inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities, reported USA Today. Such bonds, which generally pay a fixed interest rate, become more attractive when interest rates fall and less attractive as interest rates rise and investors no longer prefer their fixed rate.
Many banks increased their holdings of bonds during the pandemic, when deposits were plentiful but loan demand and yields were weak. For many banks, these unrealized losses will stay on paper. But others may face actual losses if they have to sell securities for liquidity or other reasons, according to the Federal Reserve Bank of St. Louis.
A run on these banks could pose a risk to even insured depositors—those with $250,000 or less in the bank—as the FDIC’s deposit insurance fund starts incurring losses, the economists wrote.
