Nearly half of the 4,800 banks in the United States have burned through their capital buffers, and are now nearly insolvent, according to a new report in the Telegraph, which cites a group of banking experts.
Professor Amit Seru, an expert in the banking sector out of Stanford University, roughly half of US banks are presently underwater.
He said, “Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.”
First Republic Bank collapsed last week, and was sold to JPMorgan, the nation’s largest bank. The San Francisco-based bank had suffered liquidity issues following deposit runs that occurred during and after the collapses of Silicon Valley Bank and Signature Bank.
Several of the largest Wall Street banks supplied First Republic with a $30 billion liquidity injection, in the form of unsecured deposits, to stave off its collapse in hopes of avoiding further damage to confidence in the sector, however it proved insufficient, leading to the bank’s subsequent acquisition by JPMorgan.
On Thursday, as fears spread, trading had to be halted after share prices of Los Angeles-based PacWest and Arizona-based Western Alliance plummeted. Shares of several regional US lenders had dropped by 15% or more earlier in the week, leading to investor fears over the health of mid-sized regional lenders growing.
As interest rates rose in the Federal Reserve’s battle with inflation, the value of loans banks held at older, lower interest rates, with lower yields, dropped due to other assets having better yields at current rates. As a result, a Hoover Institution report by professor Seru and a group of banking experts, has found that roughly 2,315 banks throughout the US now find themselves sitting on assets which are worth less than their liabilities.
According to the findings of the report, the loan portfolios of these lenders is roughly $2 trillion lower than their stated book value. If these banks were to suddenly experience deposit runs, and were forced to liquidate those assets to provide withdrawals, eventually they would not have the liquidity to supply the outflows.
Professor Seru questions the decisions being made by regulators as they confront the issues faced by midsized lenders. In the case of Silicon Valley Bank, in a bid to quell panic, regulators announced they would guarantee all deposits at the bank, despite many being far above the FDIC limit of $250,000.
Professor Seru notes however, that in addition to the fact this will drain the FDIC insurance fund, and thus cannot be extended indefinitely as the crisis progresses, it does nothing to confront or resolve the greater solvency crisis which is affecting to many banks in the US.
