After the demise of Silicon Valley Bank and Signature Bank in March and First Republic Bank in April, a study of the fragility of the US banking system found that 183 more banks are at risk of failure, although only half of its uninsured depositors, those who hold deposits. over $250,000 — they decide to withdraw their funds, USA Today reported.
“The recent declines in bank asset values very significantly increased the vulnerability of the US banking system to runs by uninsured depositors,” the economists wrote in a recent paper published in the Social Science Research Network. “So our calculations suggest that these banks are at potential runaway risk, absent further government intervention or recapitalization.”
Regional banks are failing because the Federal Reserve’s aggressive rate hikes to curb inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities. reported USA Today. These 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 bond holdings during the pandemic, when deposits were plentiful but loan demand and yields were weak. For many banks, these unrealized losses will remain on paper. But others may suffer real losses if they have to sell securities for liquidity or other reasons, according to the Federal Reserve Bank of St.
A run on those banks could pose a risk even to insured depositors, those with $250,000 or less in the bank, as the FDIC’s deposit insurance fund begins to run at a loss, the economists wrote.
