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.
Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
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