Nearly 200 US banks are vulnerable to the same toxic recipe that brought down Silicon Valley Bank last week, as a series of major financial swings warn of a 2008-style crash.
There are 186 banks in the US that could fail if half of their depositors withdrew their funds quickly, according to a new study published in the Social Science Research Network.
While the US government insures bank deposits of up to $250,000, these at-risk banks have large numbers of uninsured depositors who, the study found, are more likely to withdraw their funds for fear of losing them.
Banks also hold a significant amount of their assets in interest rate sensitive financial instruments, such as government bonds, which are particularly vulnerable to interest rate hikes.
The collapse of SVB, explained
SVB, which was used as a case study in the analysis, was a favorite among techies. In fact, in the moments that presaged its downfall, US building managers at the bank’s Manhattan branch had to call the police when a group of tech founders turned up and tried to withdraw their funds.
For these clients, $250,000 was small change. SVB was not the worst capitalized bank, nor did it have the highest number of unrecognized losses, according to the study, but it was in the top 1 percent for unsecured financing.
The California-based institution parked much of its cash in long-term government bonds, which are considered ultra-safe in terms of initial investment retention, but weren’t worth as much as when SVB bought them due to rising prices. interest rates.
The bank had to sell some of those bonds to meet customer demand for withdrawals at less than what it paid for them, resulting in a loss of nearly $2 billion.
When SVB disclosed that loss, along with a plan to raise an additional $500 billion from Wall Street, it raised fears among its client base that the bank was insolvent. In a panic fueled by social media, customers rushed to withdraw their money fearing the bank would run out of cash, a classic bank run.
Unlike other banks with similar investment profiles, the particularly large deposits of SVB’s clients gave them more incentive to panic.
The study found that there were 186 banks in a similar risk position. The economists did not name the banks they believed were under threat.
“Our calculations suggest that these banks are indeed at potential risk of a run, absent further government intervention or recapitalization,” the economists wrote.
“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at potential risk of impairment for insured depositors, with potentially $300 billion of insured deposits at risk.”
Warnings of an economic collapse
While considerable steps have been taken to provide SVB clients with a soft landing (the US government promised it would support all deposits in the bank, even those over $250,000), there is little else that the government can do.
Some investment titans, including billionaire hedge fund manager Bill Ackman, have called for full insurance on all bank deposits. But, with $26.6 trillion in deposits as of September, insuring it all would be extraordinary.
In a rambling 649-word, one-paragraph tweet on Saturday, Ackman warned of economic collapse by predicting that uninsured customers would trigger a massive bank run unless the government stepped in to guarantee their funds.
“He [government] you have about 48 hours to correct a mistake that will soon be irreversible. By allowing [SVB Financial Group] to fail without protecting all depositors, the world has realized what an uninsured deposit is: an unsecured illiquid claim on a failing bank,” he wrote on Twitter.
“Absent [J.P. Morgan, Citigroup or Bank of America] to acquire SVB before the open on Monday, a prospect that I think is unlikely, or the [government] by insuring all SVB deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’.”
The bill to insure the nearly $175 billion in customer deposits at SVB will be borne by financial institutions, not the taxpayer, according to US regulators.
But if the US government were to agree to insure every dollar of the trillions in US bank accounts, it’s unclear where the money would come from.
Three banks collapse in three days
The US banking system suffered a tumultuous few days last week with the collapse of three major players.
California-based Silvergate Capital was the first to fall, announcing that it had entered voluntary liquidation after racking up $1 billion (A$1.5 billion) in losses in the last quarter, with its shares falling 67 percent.
Less than 24 hours later, SVB, the country’s 18th largest bank, went into receivership. It was the second largest bank failure in US history and the largest since the GFC.
New York-based Signature Bank collapsed soon after, the third failure of a US bank in as many days.
US state regulators said authorities had to step in and close the bank.
“Signature Bank, New York, New York, … was closed today by your state’s chartering authority,” they wrote.
In the SVB and Signature Bank cases, the US government decided to waive the $250,000 insurance limit, meaning all customers would get their money back.
“All depositors of this institution will be compensated,” the regulators said.
“This step will ensure that the US banking system continues to perform its vital functions of protecting deposits and providing access to credit to households and businesses in a way that promotes strong and sustainable economic growth.”
A fourth bank, San Francisco-based First Republic Bank, appeared to be on the brink of the abyss before being saved at the last hour by a major injection of liquidity.
First Republic Bank suffered a stock market massacre as its shares plunged 61.8 percent in a single day on Tuesday, before US regulators announced that 11 banks had stepped in to help the ailing institution.
Some of the largest banks in the US reportedly deposited $30 billion (A$45 billion) to help with First Republic Bank’s liquidity crisis.
“This show of support from a group of large banks is very welcome and demonstrates the resilience of the banking system,” the federal regulators said.
Swiss megabank also at risk
It is not just the United States that is under threat.
Credit Suisse, the world’s seventh-largest investment bank, appears to be on the brink, having also been forced to sell bonds at a loss.
The Zurich-based investment bank last year reported a loss of $8 billion by 2022. Confidence was dealt a further blow when it admitted to “material weakness” in its financial reports.
Trading in Credit Suisse has been halted several times this week as shares tumbled and its largest shareholder, the Saudi National Bank, publicly stated that it would not deposit any more money with the lender for fear of a collapse.
The Saudi National Bank, which held a 9.88 percent stake, said regulators barred it from taking more than 10 percent, but that did not stop the panic. The Swiss bank’s shares fell to 1.68 Swiss francs (A$2.71) on Thursday, the lowest price in its history.
Credit Suisse accepted a lifeline from the Swiss National Bank on Thursday night and announced it had the ability to borrow up to 50 billion Swiss francs (A$80 billion). It also said it would buy back some of its own debt.
Its share price has recovered slightly but remains stubbornly low.
The Biden Administration insisted that the string of US failures did not signal an imminent bloodbath similar to that of 2008.
When Joe Biden addressed reporters last week to announce the insurance of all deposits at SVB and Signature Bank, he did not dare use the word “bailout.”
“This is an important point: taxpayers will not bear losses,” he promised. “Let me repeat that: Taxpayers will not bear loss.”
Biden’s top economic advisers have insisted on contrasting the SVB collapse with the successive bank failures of the global financial crisis.
“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” Cecilia Rouse, chair of the White House Council of Economic Advisers, told reporters.
“The reforms that were put in place back then really provide the kind of resilience that we would like to see. So we have full faith in our regulators.”
—with Alex Turner-Cohen
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