Economists warn another 200 banks could fail

 March 20, 2023

Another 200 banks could go under as the collapse of Silicon Valley Bank continues to echo, according to a new study.

Economists at the Social Science Research Network found that some 186 banks are vulnerable to bank runs like the one that caused SVB to fail.

The Federal Reserve has been hiking interest rates aggressively to tame inflation, put this is putting stress on banks heavily invested in assets like bonds and mortgage-barged securities.

More bank failures?

Silicon Valley Bank imploded when it was forced to sell off its bonds at steep losses, which caused depositors to panic.

More banks could come under pressure and potentially break if the Fed continues tightening. The Social Science Research Network study found that 186 banks could fail if just half their depositors rush to withdraw their money.

"The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” the study found. “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”

Fears of a domino effect led President Biden to step in last week.

The administration has rejected the term "bailout" to describe his controversial interventions, including a pledge to backstop all depositors at Silicon Valley Bank and New York-based Signature Bank, most of whom had balances above the federally insured amount of $250,000.

Turmoil spreads

While Biden has pledged to do "whatever is needed" to keep the banking system from collapsing, turmoil in the markets hasn't subsided. Shares in the regional First Republic Bank plunged on Monday, despite a Biden-backed effort by Wall Street to shore it up with $30 billion in cash.

In Europe, a deal is underway to sell off the major investment bank Credit Suisse, which started to fall last week.

Biden has focused on blaming bank managers, saying they should face more severe penalties if their banks go under. But Republicans have said the crisis has its roots in Biden's social spending, which caused inflation to surge.

“The reckless tax-and-spend agenda that was forced through Congress” contributed to record high inflation that the Fed is combating through rising interest rates," Republican Senator Mike Crapo (Id.) said.

With inflation still untamed, the Fed is expected to raise rates again following a meeting Wednesday.

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