A perfect mix of losses, unsecured financial leverage and a large loan portfolio: these are mainly the reasons that caused the collapse of Silicon Valley Bank (SVB). But if you compare the situation of SVB with that of other companies in the sector, it turns out that nearly 190 banks operating in the United States are at risk of failure.
The collapse of SVB has once again reminded us of the fragility of the traditional financial system. A recent analysis conducted by some economists reveals that a large number of American banks are on the verge of collapse:
“Even if only half of uninsured depositors withdraw their funds, nearly 190 banks are at risk of significant asset writedowns. Approximately $300 billion of insured deposits are at risk.”
Monetary policies set by central banks can have a negative impact on long-term assets, such as government bonds and mortgages, which in turn can cause losses for banks. The report explains that a bank is considered insolvent if the market-to-market value of its assets — after paying all uninsured depositors — is not sufficient to repay insured deposits.
The chart above shows the assets held by the banks, based on Q1 2022 reports. The banks in the upper right corner, where SVB is also located, have the most severe losses and the largest uninsured deposits relative to assets market-to-market.
The recent hike in interest rates, which has plunged the market value of US banking system assets by $2 trillion, coupled with the high proportion of uninsured deposits at some US banks, threatens the stability of the sector.
“The recent decline in the value of bank assets has significantly increased the fragility of the US banking system against potential bank runs by uninsured depositors“, concludes the study.
The federal government is taking action to protect depositors of SVB and Signature Bank. President Joe Biden has assured that there will be no impact on taxpayers:
“Thanks to the actions taken in recent days to protect depositors of Silicon Valley Bank and Signature Bank, the American people can rest assured that our system is safe.
Citizens’ deposits will be available when they need them, at no cost to taxpayers.”
Thanks to actions we’ve taken over the past few days to protect depositors from Silicon Valley and Signature Banks, Americans can have confidence that our system is safe.
People’s deposits will be there when they need them – at no cost to the taxpayer.
— President Biden (@POTUS) March 13, 2023
