Latest Study Says 186 US Banks Are At Risk Of Failure

JAKARTA - Economic turmoil still haunts the United States (US). In fact, a study of the fragility of the US banking system found that another 186 banks were at risk of failing even if only half of their unmanaged deposits decided to withdraw their funds.

"With the failure of three regional banks since March, and another one limping on the brink, will America soon see a series of bank failures?" asked the report quoting Antara.

Bloomberg has reported that San Francisco-based PacWest Bancorp is considering sales, with its value down with a large margin.

Last week, First Republic Bank became the third bank to collapse, the second-largest bank failure in US history after Washington Mutual, which collapsed in 2008 amid a financial crisis. Silicon Valley Bank and Signature Bank closed in March.

"Regional banks have failed due to the aggressive increase in Federal Reserve interest rates to dampen inflation has eroded the value of bank assets such as government bonds and mortgage-backed securities," the report noted.

The Fed raised interest rates by a quarter percentage of points on Wednesday (3/5/2023) in their 10th consecutive steps in the fight against rapid inflation.

Most bonds pay fixed interest rates which become attractive when interest rates drop, raise demand and bond prices, according to the report. On the other hand, if interest rates rise, investors will no longer choose lower fixed interest rates paid by bonds, thereby lowering the price.

Many banks increase their bond ownership during the pandemic, when deposits are abundant but demand and loan returns are weak. For many banks, these unrealized losses will remain on paper. But others may face real losses if they have to sell securities for liquidity or other reasons, according to the Federal Reserve St. Louis.

"The recent decline in bank asset value has greatly increased the fragility of the US banking system to carry out unintegrated deposits," economists wrote in a recent paper published on the Social Science Research Network.

The massive withdrawal of funds in these banks could pose a risk even to insured deposits - those with 250,000 US dollars or less in banks - because Federal Deposit Insurance Corporation (FDIC) deposit insurance funds are starting to suffer losses, economists wrote.

Of course, this scenario will only run if the government does nothing. "So, our calculations show these banks certainly have a potential risk for massive withdrawing funds, the absence of intervention or other government reactitalization," the economists wrote.