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Nearly 190 Smaller Banks Would Collapse If Hit By Depositor Runs, New Study Finds


Despite stabilization efforts by both the public and private sector alike, smaller banks may still be at risk of suffering the same fate as Silicon Valley Bank.

Nearly 190 banks would be insolvent if even half of their uninsured deposits were withdrawn, according to a study published March 13 on the Social Science Research Network, initially reported by USA Today. The banks' fragile state is due to the decline in value of their long-term investments, namely government bonds and mortgage-backed securities.

Though SVB was an outlier in how much of its deposits were uninsured by the Federal Deposit Insurance Corp., 10% of banks registered with the FDIC are less well-capitalized than SVB, the study found. A separate 10% of banks experienced deeper losses of value on their investments than SVB had, which prompted the initial concern by startup CEOs and venture investors that led to the fateful bank run.

Though the study did not name the 186 banks it identified as at risk of a run-induced collapse, it categorized them as smaller or regional banks with a total of $300M in FDIC-insured deposits between them. The study, conducted by researchers affiliated with the National Bureau of Economic Research, used publicly disclosed data from bank balance sheets as of the first quarter of 2022.

Over the past decade, and especially since the Federal Reserve Bank began raising interest rates at an unprecedented pace last year, regional banks have been a crucial source of real estate loans, especially for construction. Regional banks are responsible for about 70% of all U.S. construction and land development loans, according to Fed data reported by The Wall Street Journal.

Should the value of long-term government bonds and mortgage-backed securities decrease further, more than just the 186 banks would be in jeopardy. The current tension in the financial system has likely driven property values down further, meaning banks and real estate could be in a negative feedback loop of value decline without further intervention.