Mark-to-Market Losses and Runs by Uninsured Depositors?

After Silicon Valley Bank failed earlier this month, a new study found that 186 more banks are at risk of failing even if only half of their depositors take their money out.

This is because the Federal Reserve's aggressive efforts to stop inflation by raising interest rates have made assets like government bonds and mortgage-backed securities less valuable.

In a recent paper on the Social Science Research Network, economists wrote, "The recent drops in the value of bank assets have made the U.S. banking system much more vulnerable to uninsured depositor runs."

The economists wrote that a run on these banks could put even insured depositors at risk—those with $250,000 or less in the bank—if the FDIC's deposit insurance fund starts to lose money.

Obviously, this scenario will only happen if the government doesn't do anything.

So, the economists wrote, "our calculations show that these banks are definitely at risk of going under if the government doesn't step in or give them more money."

What went wrong with Silicon Valley Bank?

When interest rates went up, the market value of the bonds held by the Santa Clara-based Silicon Valley Bank, which had most of its assets in U.S. government bonds, went down.

Most bonds have a fixed interest rate, which makes them more attractive when interest rates go down. This makes more people want to buy the bond, which drives up its price.

But when interest rates go up, investors lose interest in bonds because they pay a lower fixed interest rate.

At the same time, many of the banks' customers, mostly tech start-ups, were having money problems, which forced them to pull out their deposits.

The paper also says that Silicon Valley Bank had an unfair amount of uninsured funding, with only 1% of banks having more uninsured leverage. "Losses and uninsured leverage make it more likely that uninsured depositors will leave SVB."