The stability of the US banking system is currently threatened by a combination of factors. The Federal Reserve’s interest rate hikes have caused the market value of the banking system’s assets to plummet by a worrying $2 trillion. In addition, some US banks have a large share of uninsured deposits, increasing the risk of a potentially devastating run.
190 US banks
The perfect combination of losses, uninsured leverage and a loss-making loan portfolio led to the demise of Silicon Valley Bank (SVB). Comparing SVB’s situation with other players shows that nearly 190 banks operating in the United States may be at risk of a run.
A recent one analysis of economists shows that a large number of banks are at risk of uninsured deposit taking. The report read as follows:
“Even if only half of uninsured depositors decide to withdraw their money, nearly 190 banks are at risk of contagion to insured depositors, potentially putting $300 billion in insured deposits at risk.”
Central bank monetary policies can hurt banks’ long-term assets, such as government bonds and mortgages, causing them to incur losses. A bank is considered insolvent if the market value of its assets, after payment from uninsured depositors, is insufficient to repay all insured deposits, the report said.
Federal government intervenes
The Federal Reserve’s rate hikes have caused the market value of all assets in the US banking system to fall by $2 trillion. This, combined with a large number of uninsured deposits in some US banks, threatens the stability of the banks.
“Recent declines in bank asset values have significantly increased the vulnerability of the US banking system to runs from uninsured depositors,” the report concluded.
While the federal government steps in to protect SVB and Signature Bank depositors, President Joe Biden has assured that it will not adversely affect taxpayers. So far it is positive for Bitcoin, because the price has risen enormously since the problems at the banks.