The perfect mix of losses, uninsured leverage and a large loan portfolio led to the collapse of Silicon Valley Bank (SVB), among others. A comparison of the situation of the SVB with other players revealed that almost 190 banks operating in the US are at risk of a run.
While the collapse of the SVB was a reminder of the fragility of the traditional financial system, a recent analysis by economists showed that a large number of banks are vulnerable to uninsured deposit withdrawals. It read:
“Even if only half of uninsured depositors choose to exit, nearly 190 banks face a potential risk of disruption to insured depositors, with potentially $300 billion of insured deposits at risk.”
The monetary policies set by central banks can damage long-term assets such as government bonds and mortgages and result in losses for banks. The report explains that a bank is considered insolvent if the mark-to-market value of its assets — once uninsured depositors are paid — is insufficient to repay all insured deposits.
Largest insolvent institutions when all uninsured depositors run. Source: papers.ssrn.com
The data in the chart above represents the assets based on bank talks reports as of Q1 2022. The banks in the top right corner, alongside SVB (with $218 billion in assets), have the heaviest asset losses and the largest percentage of uninsured deposits in mark-to-market investments.
The recent rise in interest rates, which has reduced the market value of the US banking system by $2 trillion, combined with a large share of uninsured deposits at some US banks, is threatening bank stability.
“The recent decline in bank assets has significantly increased the vulnerability of the US banking system to uninsured depositors,” the study concluded.
See also: Breaking: SVB Financial Group Files for Chapter 11 Bankruptcy
As the federal government steps in to protect SVB and Signature Bank depositors, President Joe Biden pledged that there would be no impact on taxpayers.
However, one user pointed out to Biden on Twitter that “everything you do or touch costs the taxpayer!”
