The report says that SVB wasn’t the worst capitalized financial institution (Representational)

After the collapse of the Silicon Valley Financial institution, a brand new examine has discovered that 186 US banks are on the threat of assembly the same destiny. The key causes for this are rising rates of interest and excessive proportion of uninsured deposits, mentioned the report.

The Social Science Analysis Community examine, named ‘Financial Tightening and US Financial institution Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?’, says that 186 banks may fail if even half of their uninsured depositors withdraw their funds.

“Even when solely half of uninsured depositors determine to withdraw, nearly 190 banks are at a possible threat of impairment to insured depositors, with doubtlessly $300 billion of insured deposits in danger,” says the report.

The examine additionally means that extra banks may very well be in danger if uninsured deposit withdrawals trigger even small fireplace gross sales.

The key concern for the studied banks is that they maintain majority of their property in authorities bonds and mortgage-backed securities, that are delicate to rates of interest. The worth of these property took a dip due to the latest rise in rates of interest by the Federal Reserve.

The Silicon Valley Financial institution fell prey to those rising rates of interest because it held a lot of its property in long-term authorities bonds. These authorities bonds did not maintain as a lot value as once they had been purchased as a result of they paid much less then the present rate of interest. To make up for the deposit withdrawal demand by prospects, SVB unload a few of these property at a lack of near $2 Billion. The disclosure of those losses sparked concern amongst its prospects, largely comprising of tech start-ups, leading to them withdrawing their cash.

The report says that SVB wasn’t the worst capitalized financial institution and 10% of banks have decrease capitalization than SVB. Nevertheless, SVB had a major quantity of uninsured deposits. “Only one p.c of banks had larger uninsured leverage. Mixed, losses and uninsured leverage present incentives for an SVB uninsured depositor run,” mentioned the report.

The report hints that 186 banks face the same potential threat of failure in the event that they haven’t any escape. “Our calculations recommend these banks are definitely at a possible threat of a run, absent different authorities intervention or recapitalisation,” mentioned the report.