Hundreds More U.S. Banks Could Fail Like Silicon Valley Bank, Study Shows

Many U.S. banks have accumulated large losses from bond investments and hold uninsured deposits—a perfect recipe for a bank run.

SVB
The Silicon Valley Bank branch in Beverly Hills, California. AaronP/Bauer-Griffin/GC Images

Bank failures are rare but serious and contagious when they happen. Following the domino-like collapse of Silicon Valley Bank and Signature Bank (SBNY), nearly 190 more banks in the U.S. are at the risk of failure, according to a new study.

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SVB and Signature, both mid-size regional banks popular among startups and venture capital investors, faltered because of a high percentage of uninsured deposits and heavy losses on bond investments—largely due to the Federal Reserve’s interest rate hikes. Many other banks check these two boxes, too. And in the event of more than half of their depositors rushing to withdraw their funds, 186 banks could fail, according to a paper published in the Social Science Research Network, an electronic journal, on March 13.

The paper, authored by economists from Stanford University, Columbia University, Northwestern University and the University of Southern California, studied a sample of U.S. banks and looked at their asset exposure to interest rates and the amount of uninsured deposits they hold.

In the U.S. the Federal Deposit Insurance Corporation (FDIC) guarantees deposits of up to $250,000 per account. Depositors stand to lose any amount over that limit when a bank runs out of money.

Almost all U.S. banks have more insured deposits than SVB or Signature, the study found. But many banks are more vulnerable to investment losses. About 10 percent of banks studied have larger unrecognized investment losses than SVB and Signature, according to the study.

Rising interest rates are eroding bank assets

A year of steep increases in interest rates have eroded the value of bond assets, which are usually considered low-risk investments in normal times. U.S. banks have lost an average of 10 percent in their bond portfolios in the past year, the study found. This, coupled with uninsured deposits, provides incentives for a bank run.

“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk,” the study said. “If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.”

However, this scenario will only play out if the government does nothing. In reality, all of the banks that went under recently were rescued by the government or larger institutions.

SVB and Signature were taken over by the FDIC and their depositors were promised to be made whole. Credit Suisse was bought out by UBS over the weekend at a steep discount. And First Republic, the latest regional bank hit by a deposit run last week, received a $30 billion cash infusion from a group of large banks to prevent it from repeating SVB’s fate.

Banking stocks show signs of calm after a week of heavy selloff. The Dow Jones U.S. Banks Index rose 1.6 percent today (March 20) after falling about 10 percent last week. But First Republic shares continue to slide, falling 26 percent today.

Hundreds More U.S. Banks Could Fail Like Silicon Valley Bank, Study Shows