Nearly 190 US Banks Could Collapse, According to A Research

The recent news of the failure of the First Republic Bank, the third regional bank to fail since March 2023, has raised concerns about the stability of the U.S. banking system.

As the COVID-19 pandemic continues to take its toll on economies around the world, the U.S. banking system has not escaped unscathed. The recent news of the failure of the First Republic Bank, the third regional bank to fail since March 2023, has raised concerns about the stability of the U.S. banking system.

According to a recent study, 186 banks are at risk of bankruptcy in the U.S. if only half of the uninsured depositors decide to withdraw their deposits. Uninsured deposits are customer deposits greater than the Federal Deposit Insurance Corporation (FDIC) $250,000 deposit insurance limit. Such depositors stand to lose part of their deposits if the bank fails, making it an easy decision for them to withdraw their funds.

Nearly 190 US Banks Could Collapse, According to A Research

The failure of regional banks is primarily attributed to the Federal Reserve's aggressive interest rate hikes to reduce inflation, which resulted in the erosion of the value of banking assets such as government bonds and mortgage-backed securities. As interest rates rise, fixed-rate bonds become less attractive to investors, driving down the price of these bonds.

During the COVID-19 pandemic, many banks increased their bond holdings due to the abundance of deposits and low demand for loans and yields. However, as interest rates begin to rise, these banks may face losses if they must sell their bonds due to liquidity issues or other factors.

The case of Silicon Valley Bank is an example of this trend. The bank, which holds most of its assets in U.S. government bonds, saw the market value of its bonds decline as interest rates rose. At the same time, many of the bank's customers were experiencing financial difficulties, causing them to withdraw their deposits.

Silicon Valley Bank also has a disproportionate share of uninsured capital, with only 1% of its capital insured. This situation puts even insured depositors with less than $250,000 in the bank at risk, as the FDIC's deposit insurance fund begins to suffer losses.

The failure of regional banks raises concerns about the stability of the U.S. banking system. With PacWest Bancorp on the brink of collapse, it remains to be seen whether there will be a flurry of bank failures in the coming months. In any case, investors, depositors, and regulators must remain vigilant and take appropriate measures to prevent further failures and ensure the stability of the banking system.