186 US financial institutions vulnerable to collapse, National Bureau of Economic Research study warns

A recent study by the National Bureau of Economic Research reveals that 186 financial institutions in the United States are at risk of collapse if uninsured depositors attempt to withdraw their funds.

This research follows the recent failure of Silicon Valley Bank (SVB), where the majority of accounts exceeded the $250,000 threshold guaranteed by the Federal Deposit Insurance Corporation (FDIC). To protect the remainder of the financial system, where approximately half of deposits surpass $250,000, financial authorities hastily backed all deposits at SVB to prevent bank runs.

SVB had been forced to cover withdrawals by selling a bond portfolio that had significantly declined in value due to the Federal Reserve's efforts to curb inflation by promoting higher interest rates across the economy.

The study discovered that the Federal Reserve's monetary tightening has led to a 10% decrease in bank asset values, indicating that the overall financial system's assets are $2 trillion lower than their book value suggests.

Before the Federal Reserve raised the target federal funds rate by a total of 4.5% over the past year, the banking system would have been solvent if half or all of the uninsured depositors tried to withdraw their balances. However, the substantial losses in the value of banks' long-duration assets induced by higher interest rates have made banks much more fragile to runs by uninsured depositors, the Daily Wire reported.

Researchers examined 4,800 banks, finding that 1,619 would not be able to withstand all uninsured account holders attempting to withdraw their funds, while 186 banks would not be able to cope with half of uninsured depositors demanding their funds.

Both scenarios assume that the banks would not be forced to sell their long-term assets at fire sale prices to cover withdrawals. The scenario of all uninsured depositors seeking to withdraw their funds is considered extreme but not impossible once news of a run spreads.

Silicon Valley Bank had 78% of its assets funded by uninsured deposits, placing it in the first percentile regarding uninsured leverage. The bank provided services to almost half of the venture-backed technology and healthcare firms in the US, which typically deposit far more than $250,000 to cover operations and potential crisis expenses.

Following the collapse of Silicon Valley Bank and Signature Bank, both of which held mainly uninsured deposits, lawmakers such as Rep. Maxine Waters (D-CA) and Sen. Elizabeth Warren (D-MA) have suggested that Congress reevaluate the $250,000 deposit insurance threshold.

President Joe Biden has assured the American people and businesses that their bank deposits will be available when needed, stating that “the American people and American businesses can have confidence that their bank deposits will be there when they need them."