Why is the government acting so spooked about the banking system?
A recent study sheds some light on it. According to the NY Post: Nearly 200 banks could fail the same way SVB did: study (nypost.com).
Nearly 200 more banks may be vulnerable to the same type of risk that took down Silicon Valley Bank: the value of the assets they hold. There are 186 banks across the country that could fail if half of their depositors quickly withdraw their funds, a new study published on the Social Science Research Network found.
It comes down to the government bonds that the bank holds, as well as the relationship between bond prices and interest rates.
When interest rates go up, bond prices go down. When interest rates go down, bond prices go up.
The problem started with the Fed’s fight against inflation. In order to fight inflation, the Fed started raising interest rates. As a result, banks who hold these bonds were watching as the bonds lost billions of dollars because of rising interest rates.
A bank is okay as long as they are not forced to sell the bonds. However, a bank could be forced to sell those bonds at a loss because customers are withdrawing funds from the bank. The bank has to report those losses, customers get anxious, the bank tries to raise money, social media spreads the panic, customers are afraid the bank will become insolvent, and billions of dollars are withdrawn in a matter of hours. They call this a run on the bank.
Generally speaking, this is what happened to Silicon Valley Bank. As the panic spread, Silicon Valley Bank customers tried to withdraw $42 billion in one day.
There are 4,844 insured commercial banks in the US. The study above reports that 186 banks could get into trouble. You might think that 186 banks is a small number compared to the total number of banks in the US. Just remember, wildfires are started with a single match and just a little wind.
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