ROCHESTER, N.Y.–A new academic paper suggests as many as 190 U.S. banks are at risk of failure as a result of the ongoing increases interest rates.
The paper, published by the Social Science Research Network (SSRN), is being released at the same time two banks have already failed and another large institution, Republic Bank, is teetering. SSRN is an open-access online community that primarily serves leading academic schools and government institutions.
According to the paper’s authors, the U.S. banking system’s market value of assets is $2 trillion lower than suggested by its book value of assets accounting for loan portfolios held to maturity.
Decline in Marked-to-Market Assets
“Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom fifth percentile experiencing a decline of 20%,” the authors state. “We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent—unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run.”
According to the paper, the recently failed Silicon Valley Bank (SVB) is illustrative, with the paper finding 10% of banks have larger unrecognized losses than those at SVB.
“Nor was SVB the worst capitalized bank, with 10% of banks having lower capitalization than SVB,” the authors continued. “On the other hand, SVB had a disproportional share of uninsured funding: only 1% of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run.”
‘Potential Risk’
“We compute similar incentives for the sample of all U.S. banks. 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 paper states.
If uninsured deposit withdrawals cause even small fire sales, the authors go on to state, “substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs.”
The full paper can be found here.
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