A study from the Social Science Research Network (SSRN) has determined that nearly 200 banks across the country could experience the same crisis as Silicon Valley Bank (SVB) should a significant number of depositors withdraw their funds.
Silicon Valley Bank made headlines last week after it became the second-largest bank failure in U.S. history. The bank, which saw a large number of depositors request to have their money withdrawn at the same time, was unable to have enough cash on hand to give depositors their money.
SVB invested heavily in mortgage-backed securities and government bonds. While these are typically safe, long-term investments, they are less profitable at times when the Federal Reserve raises interest rates. Over the past year, the Federal Reserve has slowly been raising interest rates to combat the inflation crisis impacting consumers across the country. When SVB was forced to sell its assets to have enough cash to return to its depositors, it was forced to sell at a $1.8 billion loss because the interest rates had risen since the assets were first bought. The result was a complete collapse of the bank.
The study from SSRN, conducted by analysts with the National Bureau of Economic Research, suggests that 186 more financial institutions could be making the same financial mistakes as SVB, resulting in a similar fate.
U.S. Treasury Secretary Janet Yellen stated that only some banks will be protected the way SVB was if they are determined by the FDIC and the White House to pose “significant systemic risk.” In other words, only banks deemed “too big to fail” will be protected.
President Biden attempted to reassure Americans that the country’s banking system is not experiencing a crisis. The President expressed that, “the American people and American businesses can have confidence that their bank deposits will be there when they need them.” However, it remains to be seen how small community banks will be impacted by the American people’s concern for the safety of their money, and what financial institutions will and will not be aided by the federal government.
