WASHINGTON — New data help explain why government officials declared the failures of Silicon Valley Bank and Signature Bank to be a risk to not just their customers, but also the entire financial system, according to a new analysis.
“The numbers suggest that a run on deposits at those two banks could have set off a cascading series of bank failures, crippling small businesses and economic activity across wide parts of the country,” reported the New York Times.
The Times said that at its request an analysis of geographic risks from a banking crisis was done by economists at Stanford University, the University of Southern California, Columbia University and Northwestern University.
“The results show the continuing potential for widespread damage to the entire banking system, which has seen many banks’ financial positions deteriorate as the Fed has raised interest rates to tame inflation,” the Times said. “Those rate increases have reduced the value of some government bonds that many banks hold in their portfolios.”
Larger Runs Possible
According to the analysis conducted for the Times, although the damage has so far been contained, the research shows that larger runs on banks vulnerable to rate increases could result in a significant drop in credit available to store owners, home borrowers and more.
“Because so many counties rely on a relatively small number of financial institutions for deposits and loans, and because so many small businesses keep their money close to home, even a modest run on vulnerable banks could effectively stifle access to credit for entire communities,” the Times said.
That sort of credit paralysis, the researchers estimate, could afflict nearly half the counties in Missouri, Tennessee and Mississippi — and every county in Vermont, Maine and Hawaii, the New York Times added.
Support for Feds
“The analysis helps buttress the case that government officials were making based on anecdotes and preliminary data they had when they orchestrated the bank rescues during that weekend in March. As fears of a wider financial crisis mounted, the Fed, the Treasury Department and the Federal Deposit Insurance Corporation acted together to ensure depositors could have access to all their money after the banks collapsed — even if their accounts exceeded the $250,000 limit on federally insured deposits,” the Times said. “The moves allowed big companies — like Roku — that kept all their money with Silicon Valley Bank to be fully protected despite the bank’s collapse. That has prompted criticism from lawmakers and analysts who said the government was effectively encouraging risky behavior by bank managers and depositors alike.
Additional Warnings
“Even with those moves, the analysts warn, regulators have not permanently addressed the vulnerabilities in the banking system,” the report added. “Those risks leave some of the most economically disadvantaged areas of the country susceptible to banking shocks ranging from a pullback in small-business lending, which may already be underway, to a new depositor run that could effectively cut off easy access to credit for people and companies in counties across the nation.”
According to the Times, the researchers found Silicon Valley Bank was more exposed than most banks to the risks of a rapid increase in interest rates, which reduced the value of securities like Treasury bills that it held in its portfolios and set the stage for insolvency when depositors rushed to pull their money from the bank.
‘Dangerous Deterioration’
“But using federal regulator data from 2022, the team also found hundreds of U.S. banks had dangerous amounts of deterioration in their balance sheets over the past year as the Fed rapidly raised rates,” the Times said.
To map the vulnerabilities of smaller banks across the country, the researchers calculated how much the Fed’s interest rate increases have reduced the value of the asset holdings for individual banks, compared with the value of its deposits. They used that data to effectively estimate the risk of a bank failing in the event of a run on its deposits, which would force bank officials to sell undervalued assets to raise money. Then they calculated the share of banks at risk of failure for every county in the country, the Times said.
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