Researchers: Uninsured Deposits Threaten Banking System

Deposits greater than $250,000 FDIC limit Are Considered Uninsured

Silicon Valley Bank HQ

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About 200 banks could collapse if only half of customers with uninsured deposits withdraw their money in the wake of the tumult spurred by Silicon Valley Bank's failure.

Key Takeaways

  • Almost 190 banks are at potential risk of collapse if half of the customers with uninsured funds withdraw their money.
  • Uninsured depositors represent about $9 trillion dollars of banks’ liabilities, which can make runs a significant risk. 
  • The market value of U.S. banking system assets is $2 trillion lower than suggested by their book value.

The SVB collapse may be the harbinger of things to come, according to a report released this week by researchers from Columbia, Stanford, Northwestern, and the University of Southern California. They found “recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs."

The uninsured depositors make up about $9 trillion dollars of bank liabilities, posing a significant systemic risk if there is a run. Uninsured deposits are customer deposits greater than the $250,000 FDIC deposit insurance limit.

In a scenario where half of the uninsured deposits are withdrawn, the researchers suggest that 186 banks would find themselves in a position where "even insured deposits would be impaired."

The report was based on information gathered from bank call report data, capturing the asset and liability composition of the more than 4,800 U.S. banks, combined with market-level prices of long-duration assets.

Why Are Banks At Risk

The Federal Reserve's tight monetary policy is at the heart of the problem. Due to high inflation, the Fed increased interest rates, resulting in a substantial decline in the market value of long-term assets. Why is that important? A decline in the value of long-term assets held by a bank could render it unable to meet its obligations in the short-term. If a bank's liabilities exceed the value of its assets, it may become insolvent.

Take the case of Silicon Valley Bank. It took customer deposits and invested them into a portfolio of U.S. Treasury bonds with maturities longer than 10 years. But when the Fed started raising interest rates, what would normally be a safe investment, began to lose value. On March 8, SVB announced that it had sold $21 billion of its bond portfolio at a loss of $1.8 billion and that it was raising money by selling stock. With that, the bank's customers lost faith, and began pulling their money out kickstarting a chain of events that led to its collapse.

Researchers sounded the alarm in their report saying more than 10% of the banks they reviewed have "larger unrecognized losses than those at SVB."

Is There a Solution?

Based on the calculations used in the study, the U.S. banking system is especially vulnerable to bank runs in the current economic climate. But is there a solution?

The report suggests expanding even more complex banking regulations on how banks account for mark-to-market losses. However, such rules and regulations may not address the core issue.

Alternatively, banks could be subject to stricter capital requirements, reducing their capital ratio to a level similar to those of less-regulated lenders. 

According to the report, “Discussions of this nature remind us of the heated debate that occurred after the 2007 financial crisis, which many might argue did not result in sufficient progress on bank capital requirements."

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  1. “Monetary Tightening and U.S. Bank Fragility in 2023:  Mark-to-Market Losses and Uninsured Depositor Runs?

  2. Cision PR Newswire. "SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock."

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