Fears that another interest rate hike will hasten more bank failures will loom over the Federal Reserve’s meeting this week after a new study found that nearly 200 banks are at risk of the same sort of collapse as happened to Silicon Valley Bank.
The fear is that another rate hike from the Federal Reserve to tamp down inflation would sap the value of banks’ assets such as government bonds and mortgage-backed securities. That would make them vulnerable to a run by depositors — the same way SVB went bust.
“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” wrote economists at the Social Science Research Network. “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”
The network’s study estimated that 186 banks in the U.S. are vulnerable if just half of their depositors withdraw their funds.
Fed Chairman Jerome H. Powell will announce Wednesday whether the central bank is raising its benchmark rate again, after eight rate hikes in the past year, to combat chronic high inflation. Mr. Powell signaled earlier this month that the Fed might raise rates more than the expected jump of a quarter-percentage point because inflation wasn’t falling fast enough and the labor market remains strong.
But that was before the collapses of Silicon Valley Bank and Signature Bank on March 10, the second and third largest bank failures in U.S. history. And last week, California’s First Republic Bank received an emergency infusion of $30 billion from 11 of the nation’s largest banks in an aid package brokered by the Biden administration.
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The banks’ troubles have been blamed, in part, on the Fed’s rapid series of rate hikes that reduced the value of their long-term debt. The banks were unable to fulfill the run of withdrawal demands from depositors seeking higher yields elsewhere.
Bank stocks have taken a significant hit. On Wall Street, shares of First Republic Bank dropped 32% Friday. In Switzerland, shares of troubled lender Credit Suisse dropped 8%.
SVB Financial Group said Friday it has filed for Chapter 11 bankruptcy protection to seek buyers for its assets, a week after its former division Silicon Valley Bank was taken over by regulators.
The company said it has about $2.2 billion of liquidity, after ending last year with $209 billion in assets. On March 9, depositors tried to withdraw $42 billion in one day as fears spread that the bank was on shaky financial ground.
Treasury Secretary Janet Yellen, who helped to broker that deal as well as the closure of SVB, told lawmakers Thursday that the overall U.S. banking system “remains sound” and that Americans don’t need to worry about their money in banks. But even as she was testifying, big banks were teaming up to prop up First Republican Bank with the $30 billion rescue package.
The Republican chairman and top Democrat on the House Financial Services Committee announced Friday the panel will hold the first of “multiple” hearings on the collapses of Silicon Valley Bank and Signature Bank, failures that have roiled the banking industry and financial markets. Chairman Patrick McHenry, North Carolina Republican, and Rep. Maxine Waters, California Democrat, said they would question federal regulators Martin Greunberg, chairman of the board at the Federal Deposit Insurance Corp., and Michael Barr, vice chair of the Federal Reserve. The hearing will be on March 29. They said the committee “is committed to getting to the bottom of the failures of Silicon Valley Bank and Signature Bank.”
SEE ALSO: House panel makes bipartisan move to hold series of hearings on bank failures
Despite the widespread fears for the banking industry, a leading research body said Friday that Western central banks should keep raising interest rates to tame high inflation. The Organization for Economic Cooperation and Development said central banks should remain focused on bringing down inflation.
The group, which provides policy advice to governments including the U.S., said the Fed should raise its benchmark rate to a range between 5.25% and 5.5%, from the current range of 4.5% and 4.75%.
The European Central Bank raised its key rate on Thursday to 3% from 2.5%, defying expectations. The Bank of England will also hold a meeting this week to announce its latest rate decision.
One key measure of inflation in the U.S. did move in the right direction last week. The Producer Price Index, which tracks what America’s producers get paid for their goods and services, fell in February to an annual pace of 4.6%, the Labor Department reported. That was a marked improvement from the downwardly revised 5.7% annual rate in January.
Republicans are laying a big part of the blame for the banking problems on the administration.
“The reckless tax and spend agenda that was forced through Congress” contributed to record high inflation that the Fed is combating through increasing interest rates, said Sen. Mike Crapo, Idaho Republican.
Sen. Tim Scott, South Carolina Republican, told Ms. Yellen that the administration’s “handling of the economy contributed to this.”
“I plan to hold the regulators accountable,” he said.
Sen. Mark Warner, Virginia Democrat, also wondered, “Where were the regulators in all of this?”
President Biden called on Congress to allow regulators to impose stiffer penalties on the executives of failed banks, including clawing back compensation and making it easier to bar them from working in the industry.
Mr. Biden said the Federal Deposit Insurance Corporation should be able to force executives at a broader range of banks to pay back compensation if their banks fail.
“Strengthening accountability is an important deterrent to prevent mismanagement in the future,” Mr. Biden said in a statement. “Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.”