US banks are at risk of collapse as financial instability grows.

The collapse of Silicon Valley Bank (NASDAQ: SIVB) exposed a weakness in the financial system that most investors had previously paid little or no attention to.

Thanks to near-zero interest rates and unprecedented economic stimulus to jump-start the US economy during the COVID-19 pandemic, cash deposits piled up in banks, and banks bought government bonds with it. When interest rates rose again, the value of treasuries fell, but Silicon Valley Bank had no choice but to sell them at a loss as struggling startups tapped into their reserves.

Rising interest rates, which have reduced the market value of assets in the US banking system by $2 trillion, combined with the high proportion of uninsured deposits in some US banks, threaten banking stability.

A perfect mix of losses, unsecured leverage, and a large loan portfolio, among other things, led to the collapse of Silicon Valley Bank (SVB). Comparing the situation of SVB with that of other players, it was revealed that almost 190 banks operating in the United States are potentially threatened with foreclosure.
Although the collapse of SVB was a reminder of the vulnerability of the traditional financial system, a recent analysis by economists showed that many banks risk having to withdraw uninsured deposits. 

It read: 

“Even if only half of uninsured depositors choose to withdraw, nearly 190 banks are at risk of harming insured depositors, with $300 billion of deposits at risk.”

Monetary policy set by central banks can damage long-term assets such as government bonds and mortgages and cause losses for banks. The report explains that a bank is considered insolvent if the market value of its assets, after paying uninsured depositors, is not sufficient to repay all insured deposits.

Largest insolvent institutions if all uninsured depositors run. Source:

The data in the chart above represents funds based on the first quarter of 2022 bank call reports. The banks in the upper right corner, along with SVB ($218 billion in assets), have the highest value losses and the largest share of uninsured deposits among rated assets.
The recent increase in interest rates, which reduced the market value of the assets of the US banking system by $2 trillion, combined with the high proportion of uninsured deposits in some US banks, threatens the stability of the banks.
“The recent decline in bank assets has significantly increased the vulnerability of the US banking system to uninsured depositors,” the study found.

As the federal government begins to protect depositors at SVB and Signature Bank, President Joe Biden assured that it will not affect tax-paying citizens.

Source: Cointelegraph

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