A recently released report has highlighted a worrying fact: 186 banks in the United States are at risk of bankruptcy. How come? It seems that the main cause is the increase in interest rates and the presence of a high percentage of uninsured deposits.
The study, published in the Social Science Research Network (I link it here), assessed the possible losses in the value of individual banks' assets during the Federal Reserve's rate hike campaign. Assets such as Treasury bonds and mortgages can lose value when new securities offer higher rates.
When uninsured deposits become a problem
The study also analyzed the proportion of bank loans coming from uninsured depositors with accounts worth more than $250.000. Self the goal of these depositors quickly withdraw their funds from the 186 banks concerned, insured depositors could also be negatively impacted. Banks simply would not have enough assets to cover all deposits. In this case, other rescue operations may be required.
Silicon Valley Bank was not a failure, but a spark
You know the case: a bank considered solid to the point of being awarded one of the best of 2023 (Forbes) is swept away within a week. And it brings with it the fate of 2 other regional banks in the USA, with repercussions seen so far in Switzerland (Credit Suisse) and Germany (Deutsche Bank). Yet, in financial circles they are taking action by defining the situation as "limited". Are things really like this?
The collapse of Silicon Valley Bank due to rising interest rates and the withdrawal of uninsured deposits is far from an isolated incident. The economists who conducted this study warn that these 186 banks risk a similar fate if there is no government intervention or recapitalization. The worst banking collapse since 2008, in essence, is the spark of an explosion that could be imminent.
For which banks does the bell ring?
We are not all economists, much less me with two miserable macro and microeconomics exams behind me. But it is good to keep your eyes open to news from the sector and from our credit institutions. The failure of Silicon Valley Bank is perhaps the last great warning to banks, regulators and investors about the importance of adopting careful risk management.
For bank customers, the risk of bankruptcy for the 186 US banks (and the consequences for those in Europe and worldwide) should not be underestimated.
