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The Fed’s Monetary Tightening and the Risk Levels of US Banks

NBER: “Between March 7, 2022, and March 6, 2023, the Federal Reserve increased the federal funds rate by nearly 4.5 percentage points. This led to a $2.2 trillion aggregate decline in the market value of long-term bank assets such as government bonds, mortgages, and corporate loans. These decreases are not fully reflected in banks’ book values. In Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? (NBER Working Paper 31048) Erica Xuewei JiangGregor MatvosTomasz Piskorski, and Amit Seru show how such declines in asset values can increase bank insolvency risk due to runs by uninsured depositors, as illustrated most dramatically by the failure of Silicon Valley Bank (SVB). The researchers collect data on bank asset holdings, including bond maturities, for all 4,844 FDIC-insured banks from their regulatory filings from the first quarter of 2022 onward. They estimate banks’ market values of assets by using data on traded indexes in real estate and US Treasury securities. They find that by the first quarter of 2023, the increase in interest rates had resulted in a 9 percent decline in the marked-to-market value of the median bank’s assets. The worst 5 percent of banks had declines of about 20 percent. These marked-to-market losses are similar in magnitude to the total book equity of the US banking system. Only about 6 percent of aggregate assets in the US banking system are hedged by interest rate swaps, too little to offset most of the market value losses…”

See also The March 2023 Bank Interventions in Long-Run Context – Silicon Valley Bank and beyond

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