While officials insist that the bankruptcy of Silicon Valley Bank and the turmoil that has plagued regional U.S. banks such as First Republic Bank are isolated cases of mismanagement, some say they are not all that glitters in the coffers of US banks is gold.
In a study published last week ( Monetary tightening and US bank fragility in 2023 ), a group of academics led by Erica Jiang of the University of Southern California warns that the market value of bank assets of entities in the United States would be about two trillion dollars (1.86 trillion euros) lower than their accounting books suggest because of the rate hike in the last year.
“These losses, combined with a large part of uninsured deposits, can affect its stability. If only half of these depositors decided to withdraw their money, almost 190 banks, with deposits valued at $300 billion, would be at risk. And if a small fire is created, many more will be”, they say.
It is true that Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have stated that the banking system is well capitalized, supervised and regulated. In fact, in three days there was a net inflow of $108 billion, the largest inflow of funds in one week in the past three years in the US. But it is also difficult to know to what degree banks used derivatives to hedge the risk of rising interest rates, so the risks mentioned in the study are possible.
“What has happened suggests a clear incompetence of the supervision of the bank and the regulators”, says Roberto Álvarez del Blanco, essayist and university professor, from Silicon Valley. “It should have been obvious to the Federal Reserve that banks with long-term assets and short-term liabilities that had not hedged interest rate risk would experience significant losses as rates rose. In addition, the Fed has or can obtain information about banks’ assets and liabilities and the degree to which they hedged that interest rate risk. Therefore, they knew, or should have known, which banks were most exposed to the risk of interest rates, when they started to rise. If they can’t detect something as simple as Silicon Valley Bank’s problems, what else are they not seeing?”, the academic reasons.
