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US banks’ assets are worth $2 trillion less than their accounts report: study


Assets held by US banks are worth a staggering $2 trillion less than declared in their accounts due to “unrealized losses” like those that led to the collapse of Silicon Valley Bank, a study suggests.

And a bank run would leave clients at nearly 200 institutions facing losses of up to $300 billion, according to the paper by leading finance academics.

The newspaper said the value of assets in the entire US banking system is “$2 trillion lower than its book value suggests.” Those assets include Treasury bonds that have fallen in value significantly in the last 12 months due to an aggressive campaign of interest increases by the Federal Reserve.

SVB’s collapse was partly because executives used their growing customer deposits to buy these bonds, then lost money when it rushed to sell them at a loss amid a bank run.

The researchers behind the new paper, published Monday, said many more banks also have “unrealized losses” on assets that are worth less than when they were bought. His $2 trillion figure dwarfs a recent estimate that US banks have unrealized losses of $620 billion.

Silicon Valley Bank fell after executives spent client deposits on Treasury bonds whose value fell due to rising interest rates. SVB had to sell these bonds at a loss to cover customer withdrawals and the bank went bankrupt

SVB was taken over last week by the Federal Deposit Insurance Corporation, which typically insures customer deposits of up to $250,000 in the event of a bank failure.

Regulators then took the highly unusual step of also covering uninsured deposits amid fears of knock-on shocks if SVB clients, many whose accounts exceeded $250,000, were unable to access their money.

Generally speaking, FDIC-insured depositors are more likely to be working and middle-class individuals, or small businesses.

The new document said that if half of the uninsured depositors in the entire US banking system decided to withdraw their money in a crisis, “nearly 190 banks are at potential risk of impairment for insured depositors, with potentially $300,000 million insured deposits at risk”.

“If uninsured deposit withdrawals cause even small liquidations, many more banks are at risk,” the researchers said.

“Overall, these calculations suggest that recent declines in bank asset values ​​have very significantly increased the fragility of the US banking system to runs on uninsured depositors.”

The paper was authored by Erica Xuewei Jiang of the University of Southern California, Gregor Matvos of Northwestern University’s Kellogg School of Management, Tomasz Piskorski of Columbia Business School, and Amit Seru of Stanford University.

Treasury bonds like the ones SVB buys are usually a safe investment. They pay a fixed interest rate for a set period of time, then the initial investment is returned when the bond matures at the end of the time period.

But investors may suffer losses if they need to sell the bond before it matures, because factors such as interest rates can affect its market value. Most large banks and institutions hold bonds to maturity.

Market turmoil triggered by the SVB collapse and fears of contagion through the banking industry have led high-profile investors and regulators to urge calm. Some say that SVB’s niche position serving primarily the tech startup industry has downplayed the potential for a ripple effect across the sector.

Gregor Matvos is the Howard Berolzheimer Chair in Finance at the Kellogg School of Management, Northwestern University

Erica Xuewei Jiang is an assistant professor of finance and business economics at USC Marshall

Finance scholars Gregor Matvos of Northwestern University and Erica Xuewei Jiang of USC Marshall contributed to the study.

Amit Seru is the Steven and Roberta Denning Professor of Finance at Stanford University.

Tomasz Piskorski is the Edward S. Gordon Professor of Real Estate in the Division of Finance at Columbia Business School.

Amit Seru of Stanford University and Tomasz Piskorski of Columbia Business School also wrote the report.

The report is alarming because the academics’ estimate is much higher than a recent assessment by the FDIC chairman that “unrealized losses” at US banks were around $620 billion.

On March 6, Martin Gruenberg told the International Bankers Institute: ‘Most banks have some amount of unrealized losses on securities.

“The total of these unrealized losses, including available-for-sale or held-to-maturity securities, was approximately $620 billion at the end of 2022.”

The Department of Justice and the SEC will investigate the collapse of SVB and the two executives who cashed in millions in shares before it was seized, news broke today.

The ousted chief executive, Gregory Becker, and chief financial officer, Daniel Beck, sold their shares two weeks before panicked bank customers fled for their money.

Becker cashed in $3.57 million worth of shares in a pre-planned automatic liquidation, while Beck parted with $575,000.

None of them have commented on the crisis at their bank, nor have they been seen since it collapsed.

The Justice Department investigation coincides with the first class action lawsuit to be filed against the bank, once a darling of the tech industry.

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