According to recent research published on the Social Science Research Network, approximately 186 banks in the United States are susceptible to the same risk that caused Silicon Valley Bank’s downfall, namely, the devaluation of their assets. Should half of their depositors rapidly withdraw their funds, these banks could potentially fail, thereby posing a threat to insured depositors with less than $250,000 in their accounts.
STAY UP TO DATE — FOLLOW BLOCKCHAIN DAILY ON TWITTER: @BLCKCHAINDAILY
The problem lies in the fact that these banks have a substantial amount of their assets tied up in interest-rate sensitive financial instruments such as government bonds and mortgage-backed securities. These types of investments decreased in value significantly due to the Federal Reserve’s interest rate hikes over the past year.
In the case of Silicon Valley Bank, the institution invested a large portion of its cash reserves in long-term government bonds, which are considered ultra-safe with regards to the preservation of the initial investment. However, the bonds were not worth as much as they were when the bank purchased them because interest rates have risen since then. Consequently, the bank had to sell some of these bonds at a loss to meet customer withdrawal demands, resulting in a nearly $2 billion loss.
This loss caused a panic among Silicon Valley Bank’s customer base, particularly venture capitalists and technology start-ups, who feared that the bank was insolvent. The panic led to a social media-fueled bank run, with customers withdrawing their money out of fear that the bank would run out of cash. To alleviate the situation, the federal government promised to back all depositors, not just those with the FDIC-limit $250,000, to prevent depositors from pulling their money out of other banks of a similar size.
The recent study shows that other banks face similar risks, as their asset books indicate an estimated $2 trillion loss in their market value. The researchers concluded that these banks are vulnerable to a potential run if a significant percentage of concerned customers attempt to withdraw their deposits. In the absence of government intervention or recapitalization, these banks are at risk of failure.
