Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?
We develop an empirical methodology and conceptual framework to analyze the effect of rising interest rates on the value of U.S. bank assets and bank stability. We mark-to-market losses on banks’ assets due to interest rate increases from Q1 2022 to Q1 2023. Asset values declined on average by 10%, and the $2.2 trillion aggregate decline was on the order of aggregate bank capital. We present a model of solvency runs, which illustrates that interest rate increases can lead to self-fulfilling solvency bank runs even when banks’ assets are fully liquid. The model identifies banks with asset losses, low capital, and critically, high uninsured leverage as being most fragile. A case study of the recently failed Silicon Valley Bank (SVB) confirms the model insights. 10 percent of banks have larger unrecognized losses and lower capital than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provided incentives for an SVB uninsured depositor run. We compute new empirical measures of bank fragility for the sample of all U.S. banks. Even if only half of uninsured depositors had decided to withdraw, almost 190 banks with assets of $300 billion are at a potential risk of insolvency, meaning that the mark-to-market value of their remaining assets after these withdrawals would be insufficient to repay all insured deposits. We briefly discuss events and subsequent research following our paper’s release on March 13, 2023. We see these as providing validity to our approach and findings.
We thank Viral Acharya, Anat Admati, Sumit Agarwal, John Cochrane, Peter DeMarzo, Douglas Diamond, Darrell Duffie, Raj Iyer, Arvind Krishnamurthy, Hanno Lustig, Raghuram Rajan, Hyun Shin, Luigi Zingales and seminar and conference participants at the Bank for International Settlement, Chicago Booth, the FDIC, IMF, US Treasury, Financial Stability Board, ABFER Annual Conference, NBER Corporate Associates Research Symposium, NBER Summer Corporate Finance Meetings and The Bank of England Workshop on Household Finance and Housing for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Between March 7, 2022, and March 6, 2023, the Federal Reserve increased the federal funds rate by nearly 4.5 percentage points...