A recent analysis by Silicon Valley Bank (SVB) has shown that over 186 US banks might still collapse, despite the gradual economic recovery from the COVID-19 pandemic. This news could be concerning to individuals who have accounts with smaller banks, as the report outlines a range of factors that could potentially lead to a bank closure. The analysis comes at a time when the US banking industry is facing increased scrutiny, with many experts questioning whether the current regulatory framework is strong enough to prevent future banking crises. The report urges customers to remain vigilant, and to ensure that they are depositing their funds in banks that are financially stable and well-positioned to weather any future storms.
Several banks have recently collapsed, facing various challenges that impacted their operations. For example, Silvergate faced multiple regulatory actions due to its dealings with bankrupt companies, including FTX exchange, its founder Sam Bankman-Fried, and its sister company Alameda Research. It also cited the bearish market in 2022 as part of the factors that made it insolvent. Silicon Valley Bank failed due to many losses in its operations and other factors, while Signature Bank faced challenges that it couldn’t handle, leading to state intervention. Furthermore, economists revealed that over 186 banks in the United States may be on the verge of a crash.
In a recent report, analysts discovered that 10% of US banks currently have more unrecognized losses than Silicon Valley Bank. They also found that Silicon Valley Bank’s capitalization is higher than 10% of existing banks. However, Silicon Valley Bank kept more share of uninsured funding since only 1% of banks had more uninsured leverage. So, the losses and uninsured leverage were enough to cause uninsured depositors to run that pulled SVB down. The analysts pointed out that if others face a similar situation where half of their uninsured depositors move to withdraw, almost $300 billion of insured deposits will be at risk. Also, if the uninsured depositors’ withdrawals cause small fire sales, many US banks will be at risk.
The economists analyzed the asset exposure of banks in the US following the interest rate hike to gauge how the US Federal Reserve’s moves affected the sector’s financial stability. Unfortunately, the analysis revealed that the sector’s market value shows a shortage of $2 trillion on the book value of assets comprising loan portfolios held to maturity. It also showed that all US banks recorded a 10% decline in their marked-to-market assets. Therefore, the declines in the values of bank assets had exposed them to the risk of insolvency if uninsured depositors decided to withdraw at once.
Despite the challenge faced by the US banking sector, central bank intervention and US President Joe Biden’s assurance show the government’s readiness to support the sector. Furthermore, top firms in the US finance sector raised $30 billion to aid a failing US bank. Depositers without insurance cover usually lose more when banks fail than their counterparts. As such, any hint of a bank crisis pushes them into a frenzy to avoid losses.