“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,” economists write.
186 U.S. banks are risk of insolvency and may collapse similar to the way Silicon Valley Bank went bankrupt last week, according to an international economic report.
A study by four economists from top universities posted to the Social Science Research Network on March 13 claimed that Federal Reserve interest rate hikes have devalued assets like U.S. Treasuries held by these banks.
“From March 07, 2022, to March 6, 2023, the federal funds rate rose sharply from 0.08% to 4.57%, and this increase was accompanied by quantitative tightening. As a result, long-dated assets similar to those held on bank balance sheets experienced significant value declines during the same period,” they wrote.
Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. 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. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
This comes as banks tapped the Fed for $165 billion in backstop liquidity, signaling banks are struggling to cover their funds.
But as Treasury Secretary Janet Yellen warned on Thursday, not all uninsured deposits would be rescued by the FDIC if future banks fail.
In other words, only the big banks would be saved.
Keep in mind, the Federal Reserve Bank launched the first phase of its Central Bank Digital Currency last November.
This is Joe Biden’s “Build Back Better” in action.