Islam Times - Nearly 200 US Banks Face Risk of Collapse Due to Interest Rate Hikes: Report

Islam Times - A new study has warned that nearly 200 American banks face risks similar to those that led to the recent implosion and bankruptcy of Silicon Valley Bank (SVB).

The report posted on the Social Science Research Network estimated how much market value the assets held by US banks have lost due to recent interest rate hikes.

Higher interest rates can benefit banks by allowing them to lend at a higher rate, but many US banks have parked a significant portion of their excess cash in US Treasuries. The value of these bonds has now greatly decreased due to the rate hikes.

The problem arises when customers request their deposits back and banks are forced to sell their securities at a significant loss in order to pay depositors back. In extreme cases, this can lead to a bank becoming insolvent, or as happened with Silicon Valley Bank, the loss of confidence can trigger a bank run.

The study's authors looked into how the amount of US lenders' funding that comes from uninsured deposits. The greater the share, the more susceptible a bank is to a run. For instance, at SVB, where 92.5% of deposits were uninsured, the deposit outflow caused the bank to collapse in a span of only two days.

The authors of the study calculated that 186 American banks do not have enough assets to pay all customers if even half of uninsured depositors decide to withdraw their money.

“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization… Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs,” the economists concluded, noting that the number of banks at risk could be “significantly” larger if “uninsured deposit withdrawals cause even small fire sales.”

The failure of Silicon Valley Bank sent ripples across the entire US banking industry and caused the closure of another lender, Signature Bank.

Many other financial institutions have seen their stocks plunge, with the six largest Wall Street banks losing around $165 billion in market capitalization, or some 13% of their combined value.

The ratings agency Moody's recently downgraded its outlook for the US banking system from 'stable' to 'negative', citing the “rapidly deteriorating operating environment.”