A recent study on the fragility of the US banking system has found that 186 more banks are at risk of failure, even if only half of their uninsured depositors decide to withdraw their funds. This report has prompted concerns of a potential cascade of bank failures in the country. The report noted that three regional banks have failed since March, with another one currently teetering on the brink.
The decline in bank asset values due to the Federal Reserve’s aggressive interest rate hikes to control inflation has been attributed as a leading cause for the failure of these banks. Many banks increased their holdings of bonds during the pandemic, which led to unrealized losses that could become actual losses if banks have to sell securities for liquidity or other reasons.
The economists who conducted the study have warned that a run on these banks could also pose a risk to insured depositors, with the FDIC (Federal Deposit Insurance Corporation) deposit insurance fund incurring losses. The study suggests that these banks are certainly at risk of a run in the absence of government intervention or recapitalization.
(Source: USA Today)
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