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Nearly 200 Mid-Size Banks Could Collapse Like SVB

Nearly 200 other banks could fall prey to the same kind of risk that brought Silicon Valley Bank down. A new study published in the Social Science Research Network found there are 186 banks nationwide that might go under, if half their depositors withdraw funds rapidly.

Even insured depositors—those who keep $250,000 or less at a bank—could struggle to withdraw cash if those institutions faced a run like Silicon Valley saw just one week ago.

The worry is that these banks have significant amounts of assets tied up in interest-rate-sensitive financial instruments, such as government bonds and mortgage-backed securities. 

The value of those older, lower-interest investments has fallen dramatically in response to Federal Reserve rate increases in the last year. 

In the case of SVB, the Santa Clara, California-based institution has been parking much of its money in longer-term government bonds, which are safe from a loss-of-original-investment perspective, but are worth less than they were when SVB bought them, since interest rates have risen ever since. 

The bank had to sell off a portion of these bonds in order to satisfy customers’ demand to withdraw money, for less than what it paid for them, leading to nearly $2 billion in losses.

When SVB disclosed this loss, as well as its plans to raise another half-billion dollars from Wall Street, it raised concerns from its largely VC and startup client base that the bank was going broke. 

In a panic-fueled, social-media-fueled flurry, customers raced to pull out money, worried that the bank was running out of business—a classic bank run. 

The federal government stepped in, promising it would stand behind all depositors, not just those who had an FDIC-capped $250,000, to try and stem the widespread panic, where depositors started pulling their money from other banks that were about the same size.

Now, research suggests a large number of these other banks may be vulnerable to the same developments, should large numbers of anxious customers begin trying to pull out their deposits. 

“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.

The study looked at banks’ asset books across the country, finding a $2 trillion loss in their market values.

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