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Following the collapse of Silicon Valley Financial institution earlier this month, 186 extra banks are prone to failing though solely half of their depositors resolve to withdraw their funds, a new Study has been discovered.
It’s because the Federal Reserve’s aggressive rate of interest hikes to cut back inflation have eroded the worth of financial institution belongings reminiscent of authorities bonds and mortgage-backed securities.
“The recent collapse in bank asset values has significantly increased the fragility of the US banking system to uninsured depositors,” the economists wrote in a latest paper revealed on the Social Science Analysis Community.
SVB:The collapse of Silicon Valley Financial institution defined in graphics
Graphics:The ripple impact: how the collapse of Silicon Valley Financial institution is affecting different US banks
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Economists wrote {that a} run on these banks could additionally pose a possible threat to insured depositors — those that have $250,000 or much less within the financial institution — due to losses within the FDIC’s deposit insurance coverage fund.
In fact, this situation will solely work if the federal government does nothing.
“Therefore, our calculations suggest that these banks are certainly at potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
How did Silicon Valley Financial institution collapse?
Within the case of Santa Clara-based Silicon Valley Financial institution, which had most of its belongings in US authorities bonds, the market worth of its bonds went down when rates of interest began rising.
It’s because most bonds pay a set rate of interest that turns into extra enticing when rates of interest fall, demand and the worth of the bond rise.
Nonetheless, when rates of interest rise, the low fastened rate of interest paid by bonds is now not enticing to traders.
This timing coincided with the monetary difficulties most of the banks’ clients – largely tech start-ups – had been coping with, forcing them to withdraw their deposits.
As well as, Silicon Valley banks had a disproportionate share of uninsured funding, with just one% of banks having excessive uninsured leverage, the paper notes. “Combined, losses and uninsured leverage provide an incentive to run an SVB uninsured depositor.”
Swapna Venugopal Ramaswamy is housing and economic system correspondent for USA TODAY. You may comply with him on Twitter @SwapnaVenugopal and join our Day by day Cash e-newsletter right here.