Nearly 200 American credit institutions could face a fate similar to the collapse of Silicon Valley Bank. The Wall Street Journal draws on data from the Social Science Research Network to frame this warning, highlighting how rising interest rates can erode bank assets and push uninsured depositors to pull their funds. A recent study identifies 186 banks that appear vulnerable to the same kind of pressure that toppled SVB, underscoring a broader risk to the U.S. banking system as monetary policy tightens.
According to research linked to the Social Science Research Network, if the Federal Reserve continues to reduce liquidity for uninsured depositors during a prolonged rate hike cycle, a large number of banks could incur losses. The report also warns that insured depositors might see the value of their accounts decline as banks struggle to cover losses with limited assets. In such a scenario, regulatory authorities would be compelled to intervene to stabilize institutions and protect consumer confidence.
Late last week, the Federal Deposit Insurance Corporation confirmed the failure of Silicon Valley Bank, a prominent lender that ranked sixteenth among the largest U.S. banks. The FDIC notification highlighted the swift nature of SVB’s downfall and its role as a case study in a climate of rising rates and liquidity stress among mid to large sized banks.
Bloomberg reported, using regulator data, that U.S. banks had borrowed a record 164.8 billion dollars from the Federal Reserve in the seven days ending mid March, a period marked by the SVB disruption and mounting liquidity concerns across the industry. The spike in emergency borrowing reflects the stress signal seen in the banking sector as institutions seek to shore up liquidity amid evolving market conditions.
The chair of the Federal Reserve, Jerome Powell, reiterated in remarks that the central bank intends to continue raising the federal funds rate to combat inflation. The stance signals a continuation of tighter monetary policy in the near term, a factor some analysts say may heighten pressures on banks with intricate asset-liability mismatches as funding costs rise.