World / Is 186 Bank of America going to sink There are signs of decline in American economy

Banking Sector: Recently many banks in America drowned. After which cracks have started appearing in the American economy and it is feared that many other banks of America may also come in trouble. A new report finds that 186 banks in the US are at risk of failure due to rising interest rates and the high proportion of uninsured deposits. 'Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Run?' on the Social Science Research Network Research posted by Title forecasts a decrease in the market value of assets of individual banks during the Federal Reserve's rate-hiking campaign. Assets such as Treasury notes and mortgage loans can decrease in value when new bonds have higher rates.

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The study also examined the proportion of banks' funding that comes from uninsured depositors with accounts over $250,000. If more than half of the uninsured depositors from these 186 banks withdraw their money early, the insured depositors may also face losses as the banks will not have enough assets for all the depositors. This could potentially force the FDIC to intervene.

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However, it is important to note that the research does not consider hedging, which can protect many banks from rising interest rates. The report mentions that if only half of uninsured depositors decide to withdraw, approximately 190 banks are at potential risk of loss to insured depositors, potentially putting $300 billion in insured deposits at risk.

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The failure of Silicon Valley Bank can be seen as an example of the risks posed by rising interest rates and uninsured deposits. The rate hike reduced the value of bank assets and worried customers withdrew their uninsured deposits. As a result, the bank failed to meet its obligations towards its depositors and was forced to close down.

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Economists who conducted the study warned that without government intervention or recapitalisation, these 186 banks were at risk. The findings underscore the importance of careful risk management and diversification of funding sources for banks to ensure their stability in the face of market volatility.