How Bad Could a US Bank Crisis Get? Maybe 190 Banks

There is a research paper from researchers at four major universities that tries to calculate how bad the banking crisis could get.

Erica Xuewei Jiang, University of Southern California
Gregor Matvos, Northwestern University – Kellogg School of Management
Tomasz Piskorski, Columbia University – Columbia Business School, Finance
Amit Seru, Stanford University

Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?

The U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. Most of these asset declines were not hedged by banks with use of interest rate derivatives.

They illustrate in a simple model that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent– unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run.

A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. They compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks with assets of $300 billion are at a potential risk of impairment, meaning that the mark-to-market value of their remaining assets after these withdrawals will be insufficient to repay all insured deposits. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Regions with lower household incomes and large shares of minorities are more exposed to the bank risk. They also show that decline in banks’ asset values eroded the ability of banks to withstand adverse credit events – focusing on commercial real estate loans. 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.

NOTE: It is not just the US banking system that is fragile. There has already been the problems at Credit Suisse and Deutsche Bank.

First Republic was a top US 15 Bank and It is on the Verge of Collapse

First Republic Bank’s (FRC.N) advisers have already lined up potential purchasers of new stock in the lender if they can fix the bank’s balance sheet. There are reports that the U.S. government is currently unwilling to intervene in the First Republic rescue process.

The crisis and possible failure of First Republic Bank impact is that it will hurt the California and Silicon Valley economy especially hard. The bank crisis might continue to spread. It will be harder to get loans, spurring still more layoffs, and increase recession risks.

First Republic faces dwindling and tough options to turn around its business with the creation of a “bad bank” or asset sales possibilities, a source familiar with the matter told Reuters, after the lender showed the extent of deposit flight during last month’s banking crisis.

5 thoughts on “How Bad Could a US Bank Crisis Get? Maybe 190 Banks”

  1. Sam Bankman Fried stands accused of fraud because he used fractional reserve lending. Fractional reserve lending is a time honored and government sanctioned fraud. All banks are insolvent. Banks gamble with your deposits and they do not have your deposits liquid and available to return. Historically every bank that held less than a 20% fraction of your deposits available went bust like Silicon Valley Bank. US banks hold only 5% of their deposits available. They gambled the other 95% on mortgages, commercial loans, and long term USTreasury bonds. That was a stupid bet and the banks are underwater approximately ten trillion dollars. The Federal Reserve can save the banks by providing ten trillion dollars thereby debasing the dollar and creating Venezuelan style hyper inflation that would cause hunger, unemployment, riots, and social disruption. Alternatively the Fed could save the dollar by raising interest rates above the true rate of inflation and sacrificing the banks.

    • I think your user name might be a double bluff. I will take it at face value…

      Having said that, you might be right. Or you could be desperately wrong. In the age of AI and the internet, predicting the future, based on 80 year old theories, is all but impossible…

  2. It’s more about the ability to spread panic runs/withdrawls, facilitate out- and e-transfers, and crush the related stocks so quickly over the internet and various social media types that cascades these ill-equipped country-bumpkin/ wannabe-VC banks into distress. They are unable to restrict internal activities and reassure stakeholders in sufficient time — and the huge amount of Treasuries they hold, now withering under rate increases and poorly-implemented ‘stress test’ recommendations, utterly inappropriate since the late 2000s.
    Nonsense all the way down.

    • I think I understand what you are trying to say, but it needs to be more coherent and linear. The way this post is written is a jumble.

      Are you saying that there are people short-selling these stocks – not based on inherently bad portfolios – but instead they are exploiting vulnerabilities in the system? Vulnerabilities made possible by easily moving money from one financial institution to another using just a few clicks of a mouse?

      This reminds me of ‘green-mailing’ in the late 80s (T Boone Pickens, etc.), and of George Soros bankrupting Hungary. People who didn’t add any value to the system, but became enormously wealthy by destroying vulnerable institutions…

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