The US banking crisis epitomised by the collapse of the Silicon Valley Bank (SVB) is not going to end soon. Rather, hundreds of other banks may follow the SVP collapse template, leading to a grotesque scene in the West, especially in the US.
According to a recent study, 186 US banks are in danger of failing because of increasing interest rates and a sizable percentage of uninsured deposits. The study’s findings indicate that the US banking crisis will intensify and there will be gory incidents in the future, which may become a fatal blow to American financial institutions.
The study, named “Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?”, has been published on the Social Science Research Network. It assessed the market value loss of individual banks’ assets during the Federal Reserve’s rate-increasing campaign. When new bonds are issued with greater interest rates, assets like Treasury notes and mortgage debts may lose value.
The research looked at the percentage of uninsured customers with accounts worth more than US$250,000 who provide the money that banks need to operate.
Even covered depositors may experience impairments if half of the uninsured depositors abruptly removed their money from these 186 banks because the banks wouldn’t have enough assets to fully reimburse all depositors. The FDIC might be forced to intervene as a result, the publication claims.
It’s crucial to remember that the study ignores hedging, which could shield many institutions from rising interest rates. However, that itself may not be a fool-proof mechanism to save an imminent US banking crisis as the study indicated.
“A possible risk of impairment to insured depositors of nearly 190 institutions and $300 billion in insured accounts exists even if only half of uninsured depositors opt to remove. Many more institutions are at danger if uninsured deposit withdrawals result in even minor fire sales (sic)”, the study noted.
A prime illustration of the dangers posed by an imminent US banking crisis, brought on by increasing interest rates and uninsured deposits, is SVB’s collapse. The rate hikes caused the SVB’s assets to lose value, and alarmed clients withdrew their uninsured savings. As a consequence, the SVB was compelled to shut down after it was unable to fulfil its duties to its depositors.
Without government action or recapitalisation, these 186 banks run the risk of suffering a similar destiny, according to the analysts who performed the research. The results highlight how crucial it is for banks to carefully control their risk and diversify their financing sources to maintain their stability in the face of market fluctuations.
It’s to be seen whether Joe Biden’s government takes appropriate steps to thwart the US banking crisis that’s knocking on its doors. If the US banking crisis intensifies, it will have a severe ripple effect worldwide and will create a major global financial crisis, which experts have been hinting at.
