(ReclaimingAmerica.net) – A new study published on the Social Science Research Network discovered that 186 banks nationwide might be at risk of failure if 50% of their depositors suddenly withdraw their funds.
Even depositors with insured accounts — those with $250,000 or less — could face difficulties accessing their money if these institutions experience a run similar to what Silicon Valley Bank encountered just a week ago.
The issue lies in these banks holding a substantial portion of their assets in interest-rate-sensitive financial instruments, such as government bonds and mortgage-backed securities. As the Federal Reserve has raised interest rates over the past year, the value of these older, low-interest investments has fallen significantly.
Silicon Valley Bank, based in Santa Clara, California, held much of its cash in long-term government bonds. Although these are considered ultra-safe to preserve the initial investment, their worth has decreased since the bank initially purchased them due to rising interest rates. The bank was forced to sell some of these bonds at a lower price than they were bought to fulfill customer withdrawal requests, leading to a loss of nearly $2 billion.
Upon revealing this loss and a plan to raise an additional $500,000 million from Wall Street, fears of insolvency among the bank’s venture capital and tech start-up-focused clientele were ignited. Customers, driven by panic fueled by social media, rushed to withdraw their money, fearing the bank would run out of cash — a textbook example of a bank run.
In response, the federal government intervened, assuring support for all depositors, not just those within the FDIC limit of $250,000, to prevent a broader panic that could prompt depositors to withdraw money from other similarly sized banks.
The study now indicates that numerous other banks could be susceptible to the same issues if many concerned customers attempt to withdraw their deposits.
The study’s economists stated, “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”
The study analyzed banks’ asset books nationwide and estimated a market value loss of roughly $2 trillion.
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