On March 10, Silicon Valley Bank, one of the most prominent lenders in the start-up ecosystem, collapsed. 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found. Of course, this scenario will only play out of if the government does nothing. “So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization ,” the economists wrote.
A report has revealed that the increasing interest rates and high proportion of uninsured deposits are posing a risk of failure to 186 banks in the United States. The research titled "Monetary Tightening and American Banking Fragility in 2023: Mark-to-Market Loss and Uninsured Depositor Runs?" published on the Social Science Research Network estimates the market value losses of individual banks during the Federal Reserve's rate-hike campaign.
In a study, an investigation was conducted into the deposits in banks that exceed $250,000 and are not insured according to regulations. According to the study, if even half of the non-insured investors with deposits exceeding $1.5 million were to withdraw their funds from these 186 banks in haste, insured depositors could also suffer losses. The report stated that in such a scenario, the banks may not have sufficient assets to pay the full amount owed to all depositors. This could potentially lead to the involvement of the FDIC (Federal Deposit Insurance Corporation)
Insufficient capital: Banks need to maintain a certain level of capital reserves to cover unexpected losses or loan defaults. If a bank's capital level falls below regulatory requirements or market expectations, it can lead to a loss of confidence among investors and customers, and ultimately to failure.
Poor asset quality: A bank's assets are its loans, investments, and other holdings. If these assets perform poorly or become non-performing (i.e., borrowers stop paying back their loans), it can lead to a decrease in the bank's income and capital, and potentially to failure.
Bad loans and loan concentration: If a bank lends too much to a particular sector or to risky borrowers, it can lead to a high concentration of bad loans that can be difficult to recover. This can erode the bank's capital and profitability, and eventually lead to failure.
Lack of liquidity: Banks need to have enough cash and liquid assets to meet customer withdrawals and other obligations. If a bank cannot meet its liquidity needs, it can lead to a loss of confidence among customers and investors, and potentially to failure.
Mismanagement and fraud: If a bank is poorly managed or engages in fraudulent activities, it can lead to losses and a loss of confidence among stakeholders. This can ultimately lead to failure.
Macroeconomic factors: Economic downturns, interest rate fluctuations, and other macroeconomic factors can impact a bank's profitability and capital. If these factors persist for a long time, it can lead to a bank's failure.
Regulatory issues: Banks are subject to many regulations, and failure to comply with them can result in fines, legal liabilities, and reputational damage. In some cases, it can even lead to a bank's failure.
Competition: Banks operate in a competitive environment, and if they are unable to compete effectively with other banks, it can lead to a loss of market share and ultimately to failure.
Technological disruption: The rise of new technologies and digital channels has disrupted the banking industry, and banks that are slow to adapt or invest in new technologies can lose customers and market share.
Geopolitical factors: Wars, natural disasters, and other geopolitical factors can impact t he stability of the financial system and individual banks. If a bank is exposed to these factors or operates in a high-risk environment, it can increase the likelihood of failure
The biggest bank collapse in history was the Lehman Brothers bankruptcy in September 2008.Lehman Brothers had over $600 billion in assets, making it the largest bankruptcy in U.S. history.
Deposit Insurance: Deposit insurance is a protection that provides coverage for deposits up to a certain amount in case of a bank failure.
Regulatory Oversight: Government agencies like the Federal Reserve, OCC, and FDIC, oversee banks and their operations to ensure that they operate safely and soundly.
Capital Requirements: Banks are required to maintain minimum capital levels to ensure they have enough funds to withstand losses.
Liquidity Requirements: Banks are required to maintain sufficient liquidity to meet their financial obligations.
Risk Management Guidelines: Banks must adhere to risk management guidelines to identify, measure, and manage risks associated with their operations.
Stress Tests: Regulators conduct stress tests to assess a bank's ability to withstand economic shocks.
Resolution Plans: Banks are required to create resolution plans, or "living wills," that outline how they would be unwound in the event of a failure.
Too Big To Fail: Some banks are considered "too big to fail" and may receive government assistance to prevent a systemic collapse.
Bankruptcy Laws: Bankruptcy laws provide a legal framework for the orderly unwinding of a failed bank.
Transparency: Regulators require banks to disclose information about their financial health, operations, and risk management practices to ensure transparency and accountability