Banking regulators and business leaders have been trying to soothe and calm Americans who have money in bank accounts, saying that U.S. banks are safe after the March 10 collapse of Silicon Valley Bank, which set off the second- and third-largest bank failures in U.S. history.
Americans “can feel confident” about the safety of their deposits, Treasury Secretary Janet Yellen told lawmakers on the Senate Finance Committee. The banking system is “sound” and both large and regional banks are “well-capitalized,” Citigroup CEO Jane Fraser told the Economic Club of Washington D.C. “This is not a credit crisis,” Reuters reported.
Analysts say Silicon Valley Bank made fatal, easily avoidable, errors in risk management that do not reflect the overall health of the financial system.
But SVB was also hit by heavy unrealized losses caused by rising interest rates that helped trigger a bank run from its large base of uninsured depositors, Fortune reported.
SVB isn’t the only bank with issues of unrealized losses, according to a March 13 paper by researchers at New York University. U.S. banks had $1.7 trillion of unrealized losses at the end of 2022. That’s almost as much as banks’ total equity of $2.1 trillion, said University of Pennsylvania professors and researchers.
An unrealized loss is a “paper” loss that results from holding an asset that has decreased in price, but not yet selling it and realizing the loss.
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Unrealized losses aren’t reflected on bank balance sheets due to an accounting practice where assets are held on bank books at the value at which they are bought, not their current market value, Fortune reported.
These losses will only be realized by banks if they are forced to sell their holdings amid a bank run where masses of depositors withdraw their funds simultaneously, which happened at Silicon Valley Bank, said Stephan Weiler, an economics professor at Colorado State University and co-director of the Regional Economic Development Institute.
Depositors asked for the money back in their accounts, forcing the bank to sell its holdings of mortgage-backed securities at a $2.4 billion pre-tax loss.
“As long as people aren’t all coming in at the same time and demanding that their deposits back, you’re OK,” Weiler told Fortune.
In another March 13 paper, university researchers found that U.S. bank assets have lost 10 percent of their value in the past year. And $17 trillion in total U.S. bank deposits, nearly $7 trillion is not insured by the FDIC.
“Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the U.S. banking system,” wrote study authors from Stanford, Columbia, Northwestern and other universities.
Market Watch identified 20 banks that raised similar red flags to SVB for sitting on huge potential securities losses as of Dec. 31, based on data provided by FactSet. The list included Signature Bank, which collapsed into FDIC (Federal Deposit Insurance Corporation ) control on March 12, just two days after SVB collapsed; Silvergate Bank, which failed on March 8; and First Republic Bank, which was saved from having to sell itself thanks to a $30 billion rescue package.
There are 108 banks in the Russell 3000 Index — a market-capitalization-weighted equity index — that had total assets of at least $10 billion as of Dec. 31.
“To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31,” Philip van Doorn wrote for Market Watch.
Some politicians and stakeholders have called for the government to insure all depositors at all banks beyond the standard deposit insurance amount of $250,000 per depositor, per insured bank, to prevent more bank runs.
However, Yellen told lawmakers subcommittee that she is not considering “blanket insurance” for all U.S. bank deposits, unless the issue becomes a systemic risk.
Photo: Former Federal Reserve Chairwoman, now Treasury Secretary Janet Yellen, speaks at Fox Washington bureau, Aug. 14, 2019. (AP Photo/Andrew Harnik, File)